Deepening Global Contraction Supports JPY and USD

The dollar and yen strengthened versus other key currencies Tuesday as risk aversion increased on more signs of deepening global contraction. Short dated Treasury yields fell to zero for the first time as investors sought safety of US government debt to avoid risk at the yearend. The euro weakened as US stocks and crude oil futures dropped. Sterling fell as UK industrial production dropped for the eighth month, the longest streak of declines since the 1980 recession. The Canadian dollar fell after the Bank of Canada cut its benchmark interest rate to 1.5%, the lowest since 1958, from 2.25%. The Australian dollar declined as Australian business confidence fell to a record low.

The USD/JPY touched the important 92-area support on increased carry-trade unwinding. The yen gained against all key currencies despite negative Japanese economic data. The USD/JPY is in a clearly defined downtrend. There is resistance in the 97-area. If the 92-area support is broken, the pair may drop significantly and that would indicate further stock-market declines.