The Bank of Japan cut short its planned two-day meeting and went straight for the currency market's jugular, sinking its teeth deep in to the artery and achieving the maximum blood-loss from its victims. The unilateral nature of its intervention was precisely what the authorities had hinted at the day before. Market participants were clearly distracted by the blood still flowing dangerously from other open wounds as growth stalls around the world adding to fears that the death-spiral facing investors is merely at the beginning.

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Japanese yen - Considering the pretty well-flagged signs that the Bank of Japan would likely intervene after its August policy meeting, the impact was still significant. A 4% slump in the yen was the largest since intervention in October 2008 and achieved more today than when G7 central bankers joined forces on March 17 in the wake of the Japanese earthquake and tsunami. And while the impressive result is a dollar rally back above ¥80.00 I'm still left wondering whether the yen's restraint can be maintained. The Bank of Japan's further easing of monetary conditions helped to revive the dollar to its strongest since July 12. The Bank increased by half its ¥10 trillion asset-purchase fund and added a further ¥5 trillion to a ¥30 trillion credit facility. Adding to the surprise today the Bank halted its meeting after one session at the request of the government. The question now is not whether the bank of Japan's effort will be sustained, but whether the yen will obey its command. That's largely out of the control of the Japanese as evidenced by plunging equity markets around the world. It's likely that all said and done, strength in the yen is likely to remain pernicious. Having peaked earlier at ¥80.23 the yen more recently traded at ¥79.50.

Euro - The single currency gave up a more than two-cent midweek rebound after the ECB left its monetary policy stand alone and despite a headline from President Trichet claiming that monetary policy remains accommodative. Given that pressure on forward-looking interest rate increases eased notably in the aftermath of the press conference, Trichet's veiled threat was probably accompanied by a caveat that the end of the world is nigh. The euro fell to a session low at $1.4152 as Trichet addressed media presence distracted by sliding equity prices around the world with investors watching for further central bank intervention as financial markets show increasing signs of dislocation. As such a healthy rebound in German factory orders for June got lost in the noise today and failed to aid a sickly euro. Against the yen the euro reached ¥114.13 at its best and recently traded at ¥113.09.

U.S. Dollar - Still running-scared at the thought of buying in to a falling market, investors balked at risk on Thursday causing the dollar to rebound. The latest sign of the health for the United States economy was nothing other than dull as initial claims data came in at 400,000 through last weekend. That's static compared to the week before but fails to indicate better times ahead for job-seekers. The big number in terms of the employment report for July is out on Friday if traders have the mettle to watch another risk-off day across the markets. It's going to take quite some reversal in sentiment to drag heavyweight equities off the floor. The dollar index surged to 74.95 for a 1% gain on Thursday.

British pound - British interest rates were last moved in March 2009 when the Bank of England cut its policy setting to 0.5%. Today, some 28-months later it maintained its stance and we'll have to wait until August 18 for the minutes to find out whether the two hawks voting for a rate hike have changed their minds. Next week the Bank's quarterly projections will be released at a time when there surely must be downside pressure from a string of weak economic data points. Recent gauges of retail sales and manufacturing have dimmed to the weakest in one and two years respectively. All of the earlier arguments surrounding the need to address inflation are taking second-billing to the dramatic slide in asset values. The pound slipped to $1.6289 at its session low but recovered to $1.6338 while it rallied per euro to 86.74 pence.

Aussie dollar - The Australia dollar has certainly underperformed this week suffering a sixth-straight session of losses as investors stare ahead in to the worst global growth outlook since the financial crisis three years ago. The nagging doubt at the back of traders' minds is that the Reserve Bank faces a tough-time ahead in maintaining its benchmark rate of interest at 4.75%. The central bank earlier warned that global angst must come ahead of a medium-term desire to tackle inflation. Price pressures will now likely dissipate faster in coming quarters and that prospect is chipping away at investors thought process as they discount an imminent easing in monetary policy. According to forward rates in Aussie money markets there is a 96% chance of an October-time rate reduction. The Aussie is likely to suffer from a reversal in attitude from investors now expecting its yawning yield differential relative to the dollar to collapse.

Canadian dollar - And while the yield differential between Canada and the U.S. is far closer at the outset, traders indiscriminately sold assets across the board that could in anyway shape of form be perceived as riskier propositions. As crude oil futures slid beneath $91 per barrel, the so-called loonie fell to $1.0350 U.S. cents. On Friday the Canadians release the July employment report keeping currency traders hopping today.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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