SYDNEY The yen soared to a record high against the dollar on Thursday in chaotic trading as a break of the previous peak triggered a host of stop-loss and option-related selling, which in turn caused a cascade of algorithmic sales.
While the escalating nuclear crisis and subsequent rush for safety was the initial spur for the move, this latest lunge higher in the yen was more about positioning.
All sorts of exotic option and structured products were being stopped-out, while many Japanese margin traders were forced to bail from leveraged trades funded in yen.
Dealers said the market was increasingly disorderly with liquidity evaporating and bids pulled, leaving huge gaps in the charts. Many were actively hoping the Japanese authorities would intervene to provide some liquidity and restore order.
"It's mayhem out there," said one trader at a Australian bank in Sydney. "The yen's been moving a big figure a second on occasions. A lot of people are crying out for the central banks to step in."
The dollar was last hovering at 78.65 yen, having collapsed as far as 76.25 on EBS after cracking the previous record of 79.75 in late New York trade.
The yen also flew on the crosses, jumping around 6 big figures on the Aussie to as far as 74.50 yen, a six-month high, before steadying at 76.30. The Aussie has shed over 8 percent on the yen in just two sessions as investors sell it as proxy for risk and global growth.
Many Japanese margin traders had been playing short yen/long Aussie positions and were forced to liquidate in a hurry, in part to cover losses elsewhere.
"I would assume that certainly the carry trade is being
unwound," said Dan Fuss, vice chairman of Loomis Sayles, which oversees $150 billion in assets.
That in turn knocked the Aussie down as far as $0.9709, a huge reversal from $1.0143 at the end of last week.
The euro dived as deep as 106.61 yen before recouping some losses to 108.88, though that compares to 114.00 early in the week. The euro/dollar pair was a relative sideshow at $1.3905.
Traders noted that the Group of Seven wealthiest nations would hold a call later on Thursday to discuss the economic impact of Japan's crisis and the yen.
"The G7 will come together to support financial stability in Japan. The last thing it needs is a financial meltdown," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
Japan's nuclear crisis may have taken its most dangerous turn yet after a U.S. official said one of the pools containing highly radioactive spent fuel rods at the stricken plant had run dry.
(Editing by Wayne Cole; Editing by Ed Davies)