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Another low reached in the currency market when Eur/Jpy reached 125.00 as a reaction from global stock plunge. Lets Analyze why.

This is the first time since 2003 Euro traded so low against Yen and Pound also plunged to 5 year low. The downfall mainly arising from Europe Central Banks further cutting Interest Rates in hope to avoid recession. On the other hand investors start selling their higher yielding assets in Euro and Pound to pay back low cost loans in Japan.

Speculation that traders will start getting out of carry trades to buy assets in Yen resulted in Yen rose higher against almost all currency pair. Japan’s currency gained 12.6 percent to 8.35 against the South African rand and 9 percent to 41.05 versus the Brazilian real. The Bank of Japan’s target lending rate of 0.5 percent compares with 13.75 percent in Brazil and 12 percent in South Africa.

The euro traded at $1.2855 at 6 a.m. in Tokyo, after falling 1.6 percent yesterday. The euro was at 125.55 yen after tumbling 4 percent and reaching 124.63, the lowest since November 2003. The yen traded at 97.61 per dollar, following a 2.6 percent gain.

Source: Bloomberg

While commercial and financial transactions in the currency markets represent huge nominal sums, they still pale in comparison to amounts based on speculation. By far the vast majority of currency trading volume is based on speculation — traders buying and selling for short-term gains based on minute-tominute, hour-to-hour, and day-to-day price fluctuations. Estimates are that upwards of 90 percent of daily trading volume is derived from speculation (meaning, commercial or investment-based FX trades account for less than 10 percent of daily global volume). The depth and breadth of the speculative market means that the liquidity of the overall forex market is unparalleled among global financial markets.

The bulk of spot currency trading, about 75 percent by volume, takes place in the so-called “major currencies,” which represent the world’s largest and most developed economies. Additionally, activity in the forex market frequently functions on a regional “currency bloc” basis, where the bulk of trading takes place between the USD bloc, JPY bloc, and EUR bloc, representing the three largest global economic regions.