Risk aversion and continuing economic problems were again the overriding feature of the FX markets. The Pound was hammered down to 1.3620 thanks to the continued banking crises and how much this will cost the UK economy going forward. There was, however, an extreme rebound late in the day when a G7 source said that the GBP would be discussed at the next G7 meeting in February in Rome. GBP/USD soared to 1.3950 as shorts were covered.
The CHF came under the spotlight and was sold heavily after the SNB signaled that it would buy an unlimited amount of foreign currency to maintain a weaker CHF if deflationary pressure continued. EUR/CHF jumped above 1.5000 after hitting a low of 1.4735 earlier in the day.
The USD and JPY both continued to benefit from safe haven flows. The JPY, in particular, rose strongly with USD/JPY hitting 87.15, while GBP/JPY fell below 120.00. The JPY and USD gains were all negated late on following the G7/GBP news along with a strong rally on the Dow Jones. The JPY remains in range this morning, after volatile price actions in the past 24 hours. BoJ left rates unchanged at 0.1% as widely expected.
A press report in Japan saying that Geithner does not want the authorities to intervene to weaken the JPY sent JPY crosses plummeting. Geithner also acknowledged that the concept of establishing a "bad bank" to quarantine "toxic" mortgage assets was under consideration. He said creating a so-called "bad bank" to absorb non-performing loans that are clogging the financial system was hard to get right, but might be part of the solution to the country's credit crisis.
EUR/JPY dipped below 115.00 while GBP/JPY fell below 123.00. This move was later turned on its head as rumors of better than expected Chinese GDP sent those short of JPY crosses scuttling for cover. There was also talk of a huge buying order in EUR/JPY from a Japanese lifer – almost €1 billion was the figure mentioned.
The moves in EUR/JPY were the main driving force in EUR/USD which firstly dipped below 1.2950 before rising to 1.3050.
The other majors (GBP, AUD and NZD) mirrored the moves in EUR/USD. The only exception was the flushing out of stops above 1.4000 in GBP/USD just after the NY close before it collapsed to 1.3835 thanks to GBP/JPY selling before recovering to 1.3950 once again.
Volatility remains savage during the Asian hours.