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The current levels of the Japanese yen put the Japanese BOJ and MOF on high alert. David Rodriguez of DailyFX discusses the chances of a big intervention if USD/JPY reaches the historic lows, and answers 4 additional  fundamental questions about the debt ceiling, the EU Summit details and more.  
David Rodriguez is a quantitative analyst for  DailyFX.com, specializing in statistical studies in currency trading markets and algorithmic trading systems for the Managed Accounts Programs offered by parent company, FXCM. He holds a degree in Economics from Williams College with heavy emphasis on quantitative methods and began trading financial markets in the tech boom and bust of 1999-2001. Since then, David’s primary focus has shifted from equities to currency markets, but he continues to trade futures and futures options on a broad range of asset classes as well as currencies.
  1. The US debt ceiling issue is gaining traction. How do you think this will unfold, and how will this affect the greenback?

Markets are showing relatively little hope of short-term resolution for the ongoing US debt ceiling issues, and such uncertainty is currently weighing on financial markets. The direct effect on the US Dollar is slightly less clear. Despite S&P 500 weakness, the typically correlated Greenback has fallen against the euro and currently trades near record-lows against the Swiss Franc and Japanese Yen. All in all such uncertainty seems to favor US Dollar weakness, and indeed we have little choice but to favor further short-term declines.

  1. Are the resolutions at the EU Summit enough to satisfy the euro in the long run? Or are we set for another round of the crisis soon?

The Greek rescue package is substantial and may represent a real breakthrough in ongoing fiscal crises. The package seems large enough and is quite comprehensive in dealing with lack of confidence in the Greek government bond market. Yet the devil is always in the details. Will individual European parliaments approve the aid package, and how exactly will private investors react to the voluntary debt restructuring? The latter seems a particularly important sticking point given that some private bondholders have resisted restructuring. The crisis is far from over, but the EU summit conclusion was certainly a step in the right direction for Greece and other periphery nations.

  1. Expectations towards more rate hikes in the euro-zone have eased. Do you think that Trichet will signal a long pause, or will his language remain tough in the upcoming rate decision?

Interest rate expectations for the European Central Bank have dropped noticeably in recent months, and we think Trichet is likely to show a more moderate tone on price pressures going forward. A key sticking point may nonetheless come on the week’s German Consumer Price Index inflation numbers and broader Euro Zone figures due shortly after. If we see inflation continue to print significantly above the ECB’s target of 2.0 percent, markets could very well shift and price in further ECB hikes through the foreseeable future. Traders remain very data-dependent and we suspect the central bank will particularly sensitive to surprises.

  1. With the current levels of the Japanese yen and the Swiss franc, will either of them try to intervene in the markets again?

There are rumors that the Bank of Japan will intervene through the near future, and indeed there is speculation that a sudden Japanese Yen tumble came on official JPY selling. The Swiss National Bank is comparatively less likely to intervene, as officials have made it quite clear they not deem such moves effective. One gets the sense that the Bank of Japan and Ministry of Finance of Japan could soon move as the currency approaches record highs against its US counterpart. Such threats make it particularly risky to sell into USDJPY declines and caution is advised.

  1. We are seeing some signs of a slowdown in China, yet the Australian and New Zealand dollars are on the rise. Do you think that China will eventually weigh on these currencies?

If we see progressive slowdowns in China, the New Zealand and Australian Dollars could certainly be affected. The New Zealand Dollar has essentially been a one-way trade on robust demand for its agricultural commodities. Yet any significant pullback in that same demand could quickly deflate the high-flying NZDUSD. It remains particularly important to watch Chinese demand for New Zealand and Australian commodity exports.

 

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