Euro Open: Overnight Volatility Ushers In Yen Buying Spree Before G7 Meeting

Yen pairs sold off overnight as risk-averse investors dumped their carry-trades after volatility hit new highs. US and Japanese equity indices fell 7.62% and 9.47%, sparking a record VIX index jump to 64.92. Japan's Monetary Policy Minutes revealed a board concerned with their export base shrinking as global cooling reduces demand for vehicles and electronics.

Key Overnight Developments

• GBPJPY Hits 5 year Low
• Bank of Japan Uncertain About Economic Outlook
• New Zealand Housing Sales Plummet

Critical Levels

Asian trading saw GBPUSD hit lows last seen November 2003 after record equity volatility ushered investors towards the Dollar's safe-haven care. EURUSD was unusually calm overnight, exhibiting a daily range of 71 pips. DailyFX Senior Currency Strategist Jamie Saettele sees this flatness to remain for at least the next 24 hours. The latter pair continues to hold support at the 1.3461 level while the former may touch 1.6880 before retracing upward towards identified resistance.

Asia Session Highlights

House Sales in New Zealand fell for the 18th straight month, down 23.7% from the same month last year. Furthermore, home prices declined for a 6th consecutive month on a yearly basis after the South Pacific economy suffered negative growth in the first half of the year.

Bank of Japan board members said that the nation's economic recovery may be delayed according to their Monetary Policy Meeting Minutes for September. Citing instability in financial markets stemming from the subprime mortgage problem, the members recognized stalling global growth would erode their export base. Internal problems have also crept up on the Asian country as 'business fixed investment [has] declined somewhat lately' while 'growth in business fixed investment [is] likely to remain sluggish for the time being, as corporate profits [are] expected to continue decreasing.' On a positive note, the bank felt that decreasing oil would continue abating inflationary pressures. Indeed Bank Lending slowed last month for the first time since December as high interest rates made it tougher to afford such loans.

Euro Session: What to Expect

Switzerland's Seasonally Adjusted Unemployment Rate is expected to have remained flat in September, coming in at 2.5% for the 8th straight month after second quarter growth continued to post positive numbers. French and Italian Industrial Production will probably shrink for a 3rd straight month in August after growth slipped into negative territory in the second quarter this year. Similarly, French Manufacturing Production is also expected to follow the fate of its Industrial counterpart.

Forex price action during European trading may be dependent upon the gyrations seen in the continent's equity indices. If US and Asian stocks are of any indication the volatility contagion may continue to spill over into the continent, possibly incentivizing traders to dump their EURJPY carries.

But markets may also be calm before and during Friday's G7 meeting. While the Treasury has given no indications of any coordinated action in the works, the primary topic of discussion will indeed be on how to tame the financial crisis. Treasury Undersecretary David McCormick has expressed a bit more solidarity with the global financial community, stating 'the turmoil is a global phenomena' and that 'we are all affected by it.' However, he also stated that there is probably no 'one size fits all solution.'

DailyFX

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