Morning Report: 08.00 London

• This morning Japan is still coming to terms with the scale of destruction following Thursday’s deadly earthquake. The Bank of Japan has stated that it is ready for some thoroughly considered actions to help the country recover. This is thought to include both traditional and non traditional monetary policy steps to help get the country back on its feet. The central bank is also thought to be keeping an eye on the ‘wolves’ in the currency markets who may be looking to short the yen aggressively. This highlights the possibility of direction intervention from the Bank of Japan in forex markets.

• As to be expected, volatility abounds with the yen swinging widely in illiquid early Monday morning session. The USD/JPY is currently trading higher, but with the Bank of Japan keen to defend the yen the picture will remain unclear for some time. This is especially the case with aftershocks still hitting parts of Northern Japan and reports of further explosions at the Fukushima Daiichi nuclear plant.

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• The EUR/JPY is trading higher by 0.51%, as the stronger euro pushes against the weakening yen. The euro is showing broad based strength outside of this pairing though with the EUR/GBP up 0.47% and the EUR/USD up 0.25%.

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• The euro is pushing higher after European leaders surprised with a general agreement to extend the size and scope of the European Stability Mechanism. In return for selling off nationalised assets such as Hellenic railways and Thessaloniki water, Greece will have its interest charge cut by 1% to just above 4%. A similar deal was offered to Ireland to reduce its crippling 6% bailout loan, but the Dublin government has refused to accept the condition of increasing its corparate tax rate above 12.50%. Some euro skeptics including the Telegraph’s Evans-Pritchard see the deal as a subjugation of peripheral nations that will only heighten tensions in the periphery.

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• Markets seem impressed for now. JP Morgan raising its rating for European banks this morning.

• The weaker yen and receding oil prices are helping to push money back into the US dollar, with the AUD/USD and NZD/USD down by 0.5% each this morning. With Japan and acting as an important trading partner for these nations, the Australian dollar is pushing lower ahead of the release of the minutes from the last RBA meeting tomorrow.

• Gold gapped open higher early this morning and is trading around $1427, while WTI crude prices have dropped below $100 as MENA tensions subside.

• Stock market futures point to a weaker start to the trading week, testing the gains made on Friday.

Bet Idea:

• The developing situation in Japan makes markets especially hard to read at present especially with regard to those forex pairs directly impacted by the disaster.

• Those pairs relatively unaffected such as the EUR/CHF are trading well within average volatility ranges which could present a breakout possibility. The Swiss franc is trading slightly lower on speculation that Swiss re-insurers are on the hook for large liabilities in Japan while the euro is bouncing strongly following the weekend’s surprisingly conclusive meeting of European leaders. However, Europe is rarely that simple and as the Telegraphs’ Evans-Pritchard points out, it would be no mean feat for Greece to raise 50bn euros from selling public assets, with many social, political and legal obstacles to overcome. The European banking stress test MK II also rumbles along in the background.

• So while the EUR/CHF is relatively stable this morning, there is a reasonable chance it it too could see an increase in volatility in line with the general forex market.

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One way to play this might be an IN/OUT trade predicting that the EUR/ CHF will close outside of 1.2800 or 1.3100 in 7 days time for a potential return of 105%.

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Can you post in the comments what you like to trade/invest into? No? Can’t or won’t?

I assume that if you continue reading my blog, we’re sort of on the same wave. But when I go through these periods of singular stock focus, it must get boring or annoying pretty quickly. If I know what you like, I can serve you better (content).

I wanted to buy more SLW (silver) but didn’t have the cash. Right now I’m trading the tax-free account and there’s an annual limit to how much I can add there. So, I got out of the XLF trade for a total profit of $3.20, and added SLW.

I added SLW twice since the initial buy-in on Feb 7. My ACB on it is $35.58. [ edited to add: current price (SLW: 20.91 +1.26%) ]

A note on options: XLF options are fairly priced and track the stock very very well. Surprised me. SLW options are lagging behind. Didn’t surprise me 🙂

What’s up with the dollar? I still have some US$ left, should I just convert it all to Cad$?