CNY/JPY Continues to Move to Upside
CNY/JPY has continued its move to the upside, as USD/JPY leads the charge.
Last month I noted the support at 12.20 in CNY/JPY and suggested that this pair would experience a short-covering rally. Since then it has rallied to 12.49, just shy of the 200-Day Moving Average at 12.50.
Japan has very little interest in having a strong Yen against its Chinese trade competitor, and is generally quite vocal whenever the cross nears the 12.20 area. While many argue that the reason for the short covering is the higher yields in the US, I would argue that this is a by-product. The real reason is that June and July 2012 saw significant risk moving into safe-havens. These would include both US treasuries and the Japanese Yen.
The safe-haven move came as the market worried about a collapse in the Euro-zone. This is a worry that has been with the market for the past few years, reaching a high-point in early summer. The odds of Eurogeddon have diminished significantly since then as the summer has continued on. While Europe has been largely on vacation, the ECB and the EU have been hard at work shoring up the legal end of their Summit promises.
The market now waits for German and European courts to validate the ESM, while the ECB waits for a formal aid request from Spain. Yields in the periphery have decreased dramatically from their highs, and the EU/US 2 year basis swap is trading close to its narrowest in 12 months. The EU has consistently noted that it works on its own timetable, and not the market’s. This summer and its lack of volatility has played into their hand. September and October should be interesting, but for now it looks like August will see continued short covering of risk-on positions. The market isn’t covering short positions because things are better in Europe. Rather it is covering risk-off positions because Eurogeddon has failed to come to fruition.
Douglas C. Borthwick