JPY crosses recovered sharply as Asian equities fought back from new lows and on intervention risk.

The weakness in emerging markets is feeding into pronounced weakness and confidence in the export-driven Germany economy and has been a factor in the weak EUR of late. This and declining inflation threats finally had Trichet out yesterday signaling that the ECB will lower rates next week - with a 50 bp cut likely both then and possibly also in December. German 2-year rates have plummeted from over 4.50% in July to about 2.60% yesterday and appear to be on their way to the 2.00% lows from the post tech-bubble lows. But not only are German exports threatened by the emerging market crisis. European banks are also very much on the hook, having been the chief lenders to emerging markets in recent years - and that's another way we can connect EUR weakness with EM weakness. For the EUR to consolidate, we will also need to begin to see more stabilization/liquidity in the EM currencies and markets. There are a few signs of this out there, but nothing definitive thus far.

JPY crosses have seen a huge rally overnight from very depressed levels. Initially, the market seemed to thumb its nose at the idea of BoJ intervention, even after the imminent threat of such intervention was made explicit with the unplanned G-7 statement yesterday which was essentially a public green-light for Japan to intervene at will. At these levels and considering the desperate liquidity conditions in the market, the market ought to take the threat more seriously - the BoJ has enormous firepower and this isn't 2003. The rally overnight is a sign that the market is taking this threat more seriously. As well, a new naked short-selling rule was moved forward to today in Japan and has given the Nikkei some short term support (originally, the move was scheduled for Nov. 4) As JPY crosses go, so likely also will go the USD crosses, meaning that this powerful new force in the markets may finally serve to halt the seemingly unstoppable declines we have seen. If nothing else, the move will now be far more fraught with choppy two-way action even if the decline continues, as Japan is likely drawing a line in the sand here.

The countervailing force in this market to any potential moves by the BoJ and other Central Banks' intervention efforts is the strong risk of both month-end and year-end-related forced liquidation by mutual funds and hedge funds as they contend with an avalanche of redemptions. The question is to what degree speculation has entered the picture and tried to take advantage of the desperation out there. The end of the month trade is upon us this week and may be a key test for where we stand on this front. If forced liquidations of assets continue to take the upper hand then the seemingly endless vortex of declines may continue.

In any case and especially after last Friday's action, we must underline that risk has never been higher in the markets and one must tread more carefully than ever in these markets.

Chart: EURUSD
Very short term action suggests a bit better probability on the technical side that we may see a consolidation higher in the short term, even if we have seen countless times in the recent past when any attempts at rallies in risk appetite have been short lived indeed. If yesterday's high around 1.2585 gives way, then we may focus on the 1.2730 old low and even the 1.2885 level, which is the 0.382 Fibo retracement of the last leg lower. To the downside, if the double bottom at 1.2325 can't hold the pair for now, then the 1.2000 round number and 1.1820 area 200-month moving average may be the next focus in the bigger picture.