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Thursday, March 01, 2007

Yen Outlook (1st March 2007)

JPY edged higher in European trade, extending the gains made in the Asian afternoon. Losses on the Asian equity markets fueled further risk reduction and this added pressure on positions. USD/JPY made a test of the 118.10 level as a bout of US name selling was noted, with model funds and speculative based accounts looking to force an extended move lower.

A number of players covered shorts in the wake of decent Japanese demand. However, both USD/JPY and EUR/JPY struggled to make sustainable gains and downside pressure increased. Reports of Kampo bids in USD/JPY at 118.10 and 118.00 reduced volatility but recovery was negligible, with the pair stuck at 118.10. MOF's Watanabe was very vocal on carry trades.

He did not think the recent JPY gains was true carry trade unwinding as the move would have been much larger. He made a guesstimate of Y10-20 trillion as the size of carry trades but acknowledged that data was unavailable and it was difficult to come up with an accurate number. Focus has turned to US data after yesterday's weakness raised US recession risk. US PCE and ISM are due at 13:30GMT and 15:00GMT respectively.

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