The Japanese yen strengthened Tuesday as equities markets declined, reducing investor interest in risky investments such as carry trades financed with low-yielding currencies such as the yen.

The retreat from carry trades weakened currencies with high yields, such as the Australian and New Zealand dollars, but the yen also gained on the US dollar and the yen.

In late-morning trade in New York, the yen traded at ¥102.3098 to the Australian dollar, at ¥80.604 to the New Zealand dollar, at ¥168.1536 to the euro and at ¥107.3950 to the US dollar.

The Australian dollar was also weaker versus the greenback, with an Aussie worth 95.29 cents US while the New Zealand dollar dropped to 75.05 cents US to the kiwi.

The Aussie was down in relation to the US dollar after data from a survey by National Australia Bank (ASX: NAB) showed that business confidence was down in June in Australia, while the New Zealand dollar was hurt by speculation that the Reserve Bank of New Zealand could cut interest rates from the current 8.25 percent.

Meanwhile, the greenback strengthened versus the euro to trade at $1.5657 to the shared currency on comments from Federal Reserve Chairman Ben Bernanke, who said in a speech in Virginia that the Fed is considering extending access to direct loans to securities dealers who handle US government debt.

Federal Reserve Chairman Ben Bernanke has the market guessing about whether interest rates will be increased this year. His comments this morning about increasing the duration of emergency lending to investment banks reduces the chance that borrowing costs will rise. Take a look at the recent comments from Fed and ECB officials:

US Fed: Down Playing an Interest Rate Hike?

Ben Bernanke, Federal Reserve Chairman (Voting Member)

"The Federal Reserve is strongly committed" to financial stability and is "considering several options, including extending the duration of our facilities for primary dealers beyond year-end,"

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said. - July 8, 2008

Janet Yellen, San Francisco Fed President (Non-Voting Member)

"Things could get worse before they get better," "The unemployment rate could increase"

"The risks to inflation are likely not symmetric and they have definitely increased. We cannot and will not allow a wage-price spiral to develop," - July 7, 2008

Henry Paulson, US Treasury Secretary

There is a strong possibility that we will be growing at the end of the year - that we will have stronger growth at the end of the year than we have now."

"Our biggest concern is the downturn."

"There’s no doubt that high headline inflation numbers are a real concern to Americans, but core inflation is relatively contained and my biggest focus today is on the downside risks, which are housing, oil prices, and what is going on in the capital markets." - July 3, 2008

Federic Mishkin, Fed Governor (Voting Member)

"Growth could continue to be quite weak, though I would hope it would pick up next year," - July 2, 2008

ECB: Respect the Words "No Bias"

Gertrude Tumpel-Gugerell, ECB Board Member

This (no bias) is a shared feeling within the Governing Council." - July 8, 2008

Yves Mersch, ECB Governing Council

‘We are sending a signal today which shows that we are determined to act against home-made inflation.’ - July 4, 2008

Klaus Liebscher, ECB Council Member

"I cannot rule out a transitory further rise in the inflation rate, the extent of which is open…But I stick to the scenario that during 2009 inflation will moderate, although will still be above our definition of price stability."- July 4, 2008

Jean-Claude Trichet, European Central Bank President

"This (no bias) is a shared feeling within the Governin’Against the present background and on the basis of our present assessment, we believe that the monetary policy stance after today’s decision will contribute to achieving our objective of price stability. Starting from here, I have no bias. You are aware of our constant position, which is fully part of our monetary policy handling. We make no pre-commitment on the medium term and we do always what is necessary to deliver price stability in line with our definition in the medium term. I insist on both "the medium term" and "in line with our definition". And we do what is necessary to be credible in this delivery in order to solidly anchor inflation expectations in line with our definition.’

‘First of all, at the mid-point of this year, we do not have a rate of growth that is flattering. That is clear and I warn you in advance that the second quarter will be very different from the first quarter. The two quarters must be taken into account together, because we clearly had a very flattering first quarter, which will certainly not be mirrored in the second quarter. And I can say that the third quarter will probably not be particularly flattering either. That being said, the information we have at our disposal permits the Governing Council to trust that its assessment of moderate ongoing growth is appropriate at the time of speaking. But I also told you that the risks were on the downside.’ - July 3, 2008

BoE: Inflation Should Ease on its Own

Charles Bean, Bank of England Chief Economist

A "more persistent" or "more pronounced" slowdown may lead "inflation to undershoot the target in the medium term."

"The pickup in inflation should be temporary provided pay growth doesn’t try to compensate for the overall pickup in inflation," Bean told the committee today. - July 2, 2008

DailyFX

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Back to Square One

Market Overview

The anticipated euro dollar break out wasn’t to be and the market has dropped back into the centre of a range. Whilst the dollar bear story has clearly weakened in the short term, the risk over the long term remains to the downside and, after what could be another fortnight of range bound price action, a break-out should be forthcoming.

Interestingly, despite the drop in equities, precious metals have remained range-bound and traction in the yen has been very limited. Whilst relationships can break down, there is also a risk of a sharp correction in the yen, although there does not appear to be any immediate risk of this. Indeed euro yen continues to try and hold over the 2007 resistance at 168.95 and should attempt a final squeeze.

Euro sterling continues to be painted into a corner. The break-out risk favours the upside, but clear resistance at 0.8001 is the main hurdle. As the trigger lines converge for a break out, we should be close to a resolution. All in all the market does feel very short term in orientation, but hopefully will not remain this way for too much longer.

VIX index. Equity volatility usually equates to a pick up in yen volatility. Whilst the relationship has been more tenuous of late, it could still be a leading indicator. The long term bias remains yen bullish.

Euro/US dollar

Unfortunately, despite all the forces conspiring against the dollar, the range remains intact. However, the bias continues to buy euros looking for a break of 1.6020 and then 1.7200 over the coming months. From a strategic perspective, 1.5416 is trendline support so any dip to 1.5430 is a buy level on stops below 1.5270.

US Dollar/Japanese yen

Back to square one here. 108.60 is the main trigger level to reverse the dollar trend. Whilst below this key resistance, the preferred view is to sell dollars looking for 100. A pick up in the VIX index has not seen the normal traction in the yen, but there is still time.

Sterling/ US dollar

I got the break-out wrong here. Whilst I still expect it to break from a long term persepctive, the market is back in the range with another lower high formed at 2.00. 1.9388 is key support and a breach would severely weaken the long term bullsih case.

Euro/Japanese yen

Despite the move in equities, euro yen has remained resilient. The market continues to press new highs. It feels like there is going to be an inevitable correction just as I go long, but try a bullish strategy here, buying the current 167.66 on a stop and reverse through 165.60, target 172.00.

Australian dollar/US dollar

The break-out wasn’t to be and stops have been hit at 0.9540. For choice, parity is still the favoured target, but given the failed breakout, look to buy a deeper retracement to 0.9390 on stops below 0.9340.

Euro/Sterling

The break-out looks close to occuring as the trigger levels converge although intra-week ranges have been large. For choice the bias is to the upside with a break of 0.8001 a key signal. Stops are below 0.7875.

US dollar / Swiss franc

The bearish dollar strategy remains. Stops came close at 1.0360 and the range continues to frustrate, but targets remain at parity and 0.9600.

US dollar / Canadian dollar

Whilst this market is range bound and has been for some time, the downward trend should resume shortly, perhaps in the next few weeks. Look to sell US dollars with a stop over the 1.0311 resistance line. Initial targets are at 0.9600.

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