Forex observers have been awaiting a big move in the Japanese yen as upside pressure on the unit has been maintained in light of growing volatility in global markets. The slide in equity markets around the world that has robbed overall valuation by some $6 trillion in recent weeks has raised appetite for typical safe haven plays of the yen and the Swiss franc. Japanese officials keep discussing the need and willingness to act. The rising volatility in global markets has, however, been accompanied by diminishing volatility in the Japanese yen with its daily variance becoming ever smaller. That speaks to the ongoing worries over the situation and isn't something the Bank of Japan on its own can resolve by a wave of intervention. On Friday morning the yen finally broke out of its range springing to a post WWII high at ¥75.94 with no sign of policy response from the Bank.

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Euro - The euro made a beeline for $1.4450 after earlier falling to its lowest in a week on hopes that German opposition to draft proposals for a new borrowing mechanism might be overcome. Regulators in Brussels are moving ahead with draft proposals to build a euro bond issuance warehouse from which euro-area governments can tap capital markets by issuing what would be bonds deemed safer by investors. Investors this week have found confidence a rare commodity with sellers been forced to act against better judgment as the economic picture starts to look less and less convincing. The rebound in the single currency has captured the imagination of the markets at the end of a hairy week. Losses for stocks have built not just because confidence in the health of the global economy has slumped but also on account of the growing perception of intransigence amongst European governments. Only yesterday German Chancellor Merkel said that a euro bond vehicle was not the right solution for Europe's debt crisis. But the top brass in Brussels seem to be short of an alternative, which is creating fear among investors. As that fear plays out in weaker stocks it's cheapening the capitalization across the financial system and raising the stakes in the event of what seems like an inevitable collision.

Japanese yen - Overnight, Finance Minister Noda said that he's planning to creep up in surprise on the yen, catching dealers unaware. He also said that the Japanese would be watching U.S. markets tonight in Asia as the crisis in financial markets worsens. It would seem that dealers crept up behind Noda San on Friday instead as the yen's strengthening came at a curious time. The reprieve for the euro on rumors of the draft proposal for a euro bond warehouse has completely turned around the performance of the equity markets. U.S. stock futures were sharply lower and within half an hour of Wall Street's opening the global benchmark had turned higher. The reprieve for stocks has not been matched by the same for the yen. What a surprise!

U.S. Dollar - It would appear that what we're seeing here is all-round dollar weakness. Quite why, remains a mystery. The dollar index did not pop to a fresh peak on Friday as equity futures were under substantial pressure although it appears as though the recovery in stocks is taking upside pressure off the need to hold the dollar. The index is lower by 0.6% at 73.83 while riskier units are clutching at the coattails of the euro and be dragged higher by apparently climbing risk appetite.

British pound - The pound is at its highest since the start of May when it was just coming off an excursion to $1.6746 when hopes were running high among dealers that the Bank of England was on the verge of a monetary tightening. The recent abandonment of calls for a rate hike by the two dissenting hawks at the central bank revealed in minutes of the August meeting again adds spice to the mix today. While the pound has benefitted from weakness in the euro, it's again difficult to explain quite why the rally in the euro is leading to a strengthening of the pound. Arguably quantitative easing is perhaps more alive in Britain than it is in the U.S., which would conceivably weaken the pound. The euro rose to buy 87.03 pence while the pound gained against the dollar to buy $1.6567.

Aussie dollar - A reprieve in the negative sentiment that has pummeled global stock markets and smashed confidence in the high-yielding Aussie dollar has also provided a tonic at the close of the week. The Aussie was earlier lower against the dollar and was heading for a fourth-straight weekly loss against the yen. However, the sudden revival of confidence has lifted the unit in to the black against both on the day and at ¥79.61 will break the string of weekly losses. The Aussie rose to buy $1.0435 U.S. cents.

Canadian dollar - The Canadian unit surged from $1.0078 to $1.0172 U.S. cents as sentiment seemingly turned on a dime. The simple catalyst was a thumping for the dollar as equity appetite was inspired by rumors running from Europe. Consumer price data softened in an earlier report rising by just 0.2% in July leaving the year-over-year pace of increase at 2.7%. That's now 1% lower than the May report. The Bank of Canada's core measure rose by the same amount between months leaving its annualized pace of change at 1.6%. Investors remain optimistic about the prospects for a monetary easing given the global shenanigans despite the otherwise robust health of the domestic economy.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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