Choppy price action from the European open with early trade seeing the Yen taken to 120.39 and 163.89 lows vs USD and EUR respectively. Hedge fund demand for carry trades and the removal of option barriers and straight vanilla strikes providing the scope for USD/JPY strength.
Exporter offers took the edge off spot and cross and as both markets were pulling lower news that China had widened its Yuan trading band by 0.5% and hiked the one-year lending rate to 6.57% from 6.39% and the one-year deposit rate to 3.06% from 2.79% added weight to the Yen rally. USD/JPY dipped under 121.00 to reach 120.70 and EUR/JPY reached 162.63. Position adjusting came to the Dollar's rescue and the market lifted back to 121.02 before relaxing into consolidation at 120.85.
The 121.50 and 164.00 option barriers remain in place and there is talk of sizeable 121.00 and 121.25 USD/JPY strikes rolling off at today's New York cut. Looking ahead, given the sizeable amount of Yen shorts still in the market, risk of further unwinding next week can be expected. The impact on the "carry trade" could provide the direction for the week as a whole.
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