Yen Still Outperforms in Forex Meltdown

The Forex meltdown takes a life of its own in Asian and European trade, reflecting further deleveraging in equity and credit markets, and especially intensified by the fall out in emerging market currencies and prolonged reaction to remarks from Bank of England Mervyn King using the word recession and anticipating considerable decline in UK inflation. Inflation had long been the main obstacle to these overdue BoE rate cuts among MPC policymakers, and Kings remarks comprise a major negative for sterling against all currencies, with USD in particular, as they bolster the case for a 50-bp rate cut to 4.00% next month, which may be followed by another cut in December to 3.75%.

GBP shed 3.3% against USD on Tuesday and 3.4% in the last 12 hours to produce a 7.6% drop this week so far to reach a 5-year low. After a brief recovery to $1.6470, cable retreats back towards $1.6350, eyeing $1.6320 and $1.6280, baring any rebound in risk appetite such as fresh rumors of intermeeting rate cut as was the case earlier this morning. GBPJPY slumped to an 8-year low of 160.54 yen, losing 29% year to date.

EUR hit fresh 24-month low at of $1.2734, while bouncing by as much as 5 pence against GBP to a one-week high of 79.10 pence. Euros selloff against the dollar is a largely a result of collective outflows into USD-based funds, whether comprising forced selling due to client redemptions or mobilization of capital to USD-based cash such as T-bills. Oils decline below $70 and golds drop to a 7-week low of $747, is $10 above the 1-year low reached on September 11. Having breached below our $1.2870 target, EURUSD faces $1.2480, which is the low from Oct 2006, lying just above the 50% retracement of the rise from the Feb 2002 low (0.8605) to this years record high ($1.6038).

JPY remains the outperformer, as risk aversion surges anew and Japans remote positioning from the banking crisis highlights the outflows. USDJPY prolonged its sell-off to a 10-day low of 98.33 yen. We mentioned last week that any rebound in USDJPY was limited at 103.00, while today we reduce this resistance to 100.50, leading to the conclusion that lower highs reflect authorities inability to preserve market rallies beyond 2 consecutive days. Interim resistance stands at 99.55, with targets standing at 98.70, followed by 98.20.

More Rate Cuts, this time from New Zealand as the central bank is widely expected to cut rates by 100-bps to 6.50%. Despite inflation standing above the RBNZ target, retail sales and housing figures have fallen significantly as of late, underlining the central banks growth priority, especially in the face of slumping commodity prices. NZDUSD eyes 0.59, followed by 0.5830, while NZDJPY targets 58.25 yen and 57.20 yen.

The above analysis is part of the Daily FX Strategy sent to CMC Markets clients