Market Panic Drives Up Yen

The risk aversion theme is back in the financial markets. Both the US dollar and the Euro are down against the Japanese yen as carry traders buy back yen to close their carry positions.

What’s causing the run-to-safety switch in sentiment are renewed fears that the world hasn’t seen the end of the credit market turmoil, making investors nervous about holding positions whereby they had sold the yen to buy high-yielding currencies like the Euro.

UK’s largest lender of buy-to-let mortgages, Bradford & Bingley, today announced a significant profit warning and also warned that the UK housing market is deteriorating.

Over in the US, another CEO was kicked off from his position today. Wachovia (WB), fourth-largest US bank, ousted CEO Kennedy Thompson after the board found him responsible for the losses that made up more than half its market value in the past year. The bank’s losses are linked to the subprime mortgage fallout in the US. Washington Mutual (WM), one of the largest US subprime mortgage companies, also made investors jittery today when it announced that CEO Kerry Killinger will step down as chairman, following pressures from angry shareholders.

When there is crisis erupting, you are also certain to see a rally in the Japanese yen and the Swiss franc in the forex markets.

Weak Manufacturing In US, Eurozone

The US ISM reported today that its May manufacturing activity index came in at 49.6 versus April’s 48.6. The May reading is slightly better than the forcast of a reading of 48.5. This is the fourth straight month of contraction in manufacturing activity in the US.

Eurozone’s manufacturing sector isn’t doing so well either: its manufacturing sector purchasing managers index tumbled to the lowest level since August 2005. Despite calls by the International Monetary Fund (in a report Monday about the ECB) for the ECB to cut interest rates further ahead, ECB honcho Trichet reiterated today that the central bank will continue to focus on combating inflation in Europe. (By the way, the ECB just celebrated its 10th birthday today)

Forex Trading

Safe-haven flows are driving the forex markets today, with the Yen and Swiss franc being the biggest gainers across the board. EUR/JPY fell at least 200 pips to an intraday low around 162.20; USD/JPY fell slightly more than 100 pips to around 104.50 as of the time of writing. Other high-yield currencies like the Australian dollar, New Zealand dollar and the Canadian dollar, all fell versus the yen sharply today. Needless to say, the British pound is also a good candidate to short today because of the Bradford & Bingley news. GBP/USD fell 180 pips to around 1.9600; GBP/JPY plunged more than 300 pips to around 205.10 today. USD/CHF is holding steady, with nearest support around 1.0380.

Tuesday:

Australia rate decision (rate expected to stay at 7.25%) 0430 GMT

Swiss CPI 0545 GMT

UK PMI construction 0830 GMT

Eurozone GDP, PPI 0900 GMT

ECB’s Trichet, Fed’s Bernanke, BOJ’s Shirakawa speak in Spain 1300 GMT

US factory orders 1400 GMT

UK Nationwide consumer confidence 2301 GMT