Tokyo to the EU rescue... but, only for a day or two

THE cure for obsession, they say, is getting a new one. And that has certainly been true of the bond market’s approach to debt-ridden Eurozone countries. The market’s focus has swung like a searchlight from troubled country to country, sending the euro plummeting until its finance ministers ask for a bailout. On Monday, the market’s dreaded eye shone on Portugal. Most now believe that it will be forced into accepting a bailout by the end of the week, despite its government’s current objections.

Currency traders will be asking what this means for the euro? The lead up to the Irish bailout certainly provided them with plenty to trade on.

The trouble for volatility-seekers, however, is that the Japanese may have – temporarily – saved the day. Yesterday they pledged to buy up European bonds in an effort to stabilise the currency. And indeed it did, the euro gained 0.1 per cent against the dollar to $1.2966, from $1.2951. The dollar rose 0.4 per cent to ¥83.05 yen, from ¥82.71 yen. This could mean that a re-enactment of the euro’s path in the week prior to the Irish bailout is off the cards.

Strengthening the single currency against the yen is very much in Japan’s interest. Despite the Japanese finance minister’s declaration that: “To raise trust [in the EU bailout fund] is appropriate for Japan as a leading nation,” they want to ensure the euro is as strong as possible so that Europeans keep buying their cars and technology. Keeping this in mind – and noting that further bond purchases have not been ruled out – could reap profitable trades later on.

But until that prospective injection, Duncan Higgins of Caxton FX doesn’t think the effect will last: “Given that Japan looks set to make the bond purchases using its own euro reserves we’re not expecting to see any sudden pick up in euro demand.”

Neil Mellor of the Bank of New York Mellon agrees, but adds that: “The market seems to be becoming numb to the negative news.”

But he warns that the EU’s efficient crisis management of the Irish situation last year has led the market to expect a speedy bailout: “The euro will be hit hard if they don’t.” So, should the Portuguese government keep fighting the bailout calls, there could be an opportunity for bearish euro traders to get ahead of the crowd and go short at the end of the week.

If not, this picture of potential calm will disappoint traders hankering after volatility. Particularly since tomorrow’s Bank of England and European Central Bank rate announcements are widely expected to be held still. Traders keen for movement need to look back to learn from how the market dealt with its last indebted obsession.