Yen/Dollar Strengthen Due to CITI Group & Jakarta Bombings

Posted July 17, 2009

The possibility of CIT Group, Inc. and the hotel bombings in Jakarta, Indonesia led to yen and US dollar strenthening against most major global currencies. China will probably have to diversify its currency reserve holdings over the coming months which will weaken the US dollar. The Brazil real and Swiss franc both fell against the US dollar for the first time in a week.

 

The world never rests and that is true of the currency markets also.  Though implied volatility measures have recently shown a decrease in currency market volatility, daily events are still creating just that…volatility.  Some analysts are calling currency movements right now as more the result of “knee jerk” reactions rather than normal market operation.

Two days ago the dollar and yen were weakening as stock markets rose and investors abandoned the safe haven currencies for higher yielding ones.  Yesterday the yen and dollar strengthened on the news the giant financial company CIT Group, Inc. might have to file bankruptcy.

The US government has decided to not give the company any more bailout funds believing the economy has progressed to the point where CIT Group can fail and the shock waves absorbed through normal economic processes.  CIT Group must find $6 billion of financing on its own for bond guarantees.  The company is currently in talks with some potential financers.

The yen rose to 132.35 yen per euro by early this morning New York time.  The yen also strengthened against the dollar to 93.85 yen per dollar.

Also impacting the yen and dollar was the bomb explosion in the two Jakarta, Indonesia luxury hotels.  Events such as these result in investors turning back to the safe haven currencies until more information is obtained.  The Indonesian rupiah weakened the most it has in three weeks when paired with the US dollar as a result of the Jakarta bombing.  The Indonesian rupiah fell to 10,175 rupiah per dollar which was a .5 percent decline.

The US dollar strengthened to $1.4101 against the euro.  The US dollar is being watched closely on the news China had accumulated a $2 trillion currency reserve balance.  This is an indication that China is having difficulty finding places to invest its massive holdings.

If China chooses to expand the diversification of its holdings by investing in emerging market economies or increasing holdings in euros, yen or Australian and New Zealand dollars, the US dollar is certain to weaken.

The UK pound weakened on the news that CIT Group, Inc. might have to declare bankruptcy.  Aggravating investor concerns is the large UK budget deficit that is growing.  This is the same problem the US faces. 

Enormous budget deficits are putting downward pressure on the pound.
The UK pound has strengthened against the dollar for the last week, but weakened early this morning against the US dollar.  The pound fell to $1.6298 and it also fell against the euro to 86.54 pence per euro. 

Sterling weakened against the yen to 152.88 yen.  The key level to watch is $1.63 US dollars per pound because of stop loss orders in place that will lead to selling of the UK currency.

Brazil’s real has been strengthening against the US dollar for the last week.  Late yesterday it fell for the first time in five days to 1.9414 real per US dollar.

In a very similar scenario, the Swiss franc also weakened against the US dollar for the first time in five days when it reached 1.0758 francs per dollar.

Canada reported that consumer prices had fallen at an annual .3 percent rate in June.  This is the first price decline the country has seen since 1994. 

The Canadian dollar showed very little activity against the US dollar despite the consumer price news and traded at 89.42 US cents.

The Bank of Canada is going to review the benchmark interest rate again on 21-July-2009 though there is little room for change.  The rate currently sits at .25 percent.

 

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