DJ Forex Focus
The Threat Of Yen. By Nicholas Hastings
The threat of Bank of Japan intervention remains high, despite the return of the carry trade that helped to push the yen lower earlier this year.
In fact, with the dollar falling rapidly towards Y90 this month, Japanese officials have already started to express their concern.
The prolonged decline in the Japanese economy, the return of global risk aversion as well as the latest dose of political risk all suggest that the carry trade, which had pushed the yen sharply lower against high-yielders earlier this year, is over.
As a result, technical analysts reckon that any bounces in the dollar over Y94 are selling opportunities as the U.S. currency eventually makes it way back down towards Y87, a level it hasn't hit since February.
In the intervening months, the return of carry - with investors borrowing in the low-yielding yen to buy higher-yielding assets - helped to drive the yen sharply lower. The pound rose by 24% against it, the Australian dollar by 26% and the Norwegian krone by 12.5%.
However, as previous periods of carry trades in mid-1995 and late-2000 show, these periods of sharp gains quickly turn into a consolidation phase. So much so that the yen's trade-weighted index is now back up over the level it was in the first quarter of this year and up at levels last seen 10 years ago, apart from the period immediately after the collapse of Lehman and the flight to liquidity seen last winter.
"If this (consolidation) is true, then it suggests that after an initial rapid recovery in risk appetite, it is typical to see an extended period of more cautious trading emerge," said Simon Derrick, a senior currency strategist with Bank of New York Mellon in London.
This is certainly the trend that has been emerging in recent weeks, as concern over the global recovery rises, risk appetite falls and the yen once again comes back into favor.
The latest political developments in Tokyo are encouraging just such a trend. By calling a general election Aug. 30, the ruling Liberal Democratic Party has increased uncertainty. Not only will a likely victory of the opposition Democratic Party of Japan mean the most important change of government since the World War II, but officials from the DPJ have joined the push for a foreign-exchange reserves diversification policy that could help to push the dollar even lower against the yen.
For the Bank of Japan, a strong yen is becoming less desirable than it might have been earlier.
As the Japanese economy fails to show any serious rebound from recession, its reliance on exports will only grow. The need for a competitive yen will become paramount, even if this can be achieved only through the use of intervention.
At the moment, the yen is being undermined a little by the latest bounce in risk appetite after Goldman Sachs and Intel have raised hopes that the second-quarter earnings season won't prove as disappointing as expected.
With equity markets showing small gains, the higher-yielders have come back into favor. By 0645 GMT, the dollar had risen to Y93.45 from Y93.39 late Tuesday in New York, according to EBS.
The euro was up at $1.4035 from $1.3935 as well as at Y131.15 from Y130.14.
In fact, with the dollar falling rapidly towards Y90 this month, Japanese officials have already started to express their concern.
The prolonged decline in the Japanese economy, the return of global risk aversion as well as the latest dose of political risk all suggest that the carry trade, which had pushed the yen sharply lower against high-yielders earlier this year, is over.
As a result, technical analysts reckon that any bounces in the dollar over Y94 are selling opportunities as the U.S. currency eventually makes it way back down towards Y87, a level it hasn't hit since February.
In the intervening months, the return of carry - with investors borrowing in the low-yielding yen to buy higher-yielding assets - helped to drive the yen sharply lower. The pound rose by 24% against it, the Australian dollar by 26% and the Norwegian krone by 12.5%.
However, as previous periods of carry trades in mid-1995 and late-2000 show, these periods of sharp gains quickly turn into a consolidation phase. So much so that the yen's trade-weighted index is now back up over the level it was in the first quarter of this year and up at levels last seen 10 years ago, apart from the period immediately after the collapse of Lehman and the flight to liquidity seen last winter.
"If this (consolidation) is true, then it suggests that after an initial rapid recovery in risk appetite, it is typical to see an extended period of more cautious trading emerge," said Simon Derrick, a senior currency strategist with Bank of New York Mellon in London.
This is certainly the trend that has been emerging in recent weeks, as concern over the global recovery rises, risk appetite falls and the yen once again comes back into favor.
The latest political developments in Tokyo are encouraging just such a trend. By calling a general election Aug. 30, the ruling Liberal Democratic Party has increased uncertainty. Not only will a likely victory of the opposition Democratic Party of Japan mean the most important change of government since the World War II, but officials from the DPJ have joined the push for a foreign-exchange reserves diversification policy that could help to push the dollar even lower against the yen.
For the Bank of Japan, a strong yen is becoming less desirable than it might have been earlier.
As the Japanese economy fails to show any serious rebound from recession, its reliance on exports will only grow. The need for a competitive yen will become paramount, even if this can be achieved only through the use of intervention.
At the moment, the yen is being undermined a little by the latest bounce in risk appetite after Goldman Sachs and Intel have raised hopes that the second-quarter earnings season won't prove as disappointing as expected.
With equity markets showing small gains, the higher-yielders have come back into favor. By 0645 GMT, the dollar had risen to Y93.45 from Y93.39 late Tuesday in New York, according to EBS.
The euro was up at $1.4035 from $1.3935 as well as at Y131.15 from Y130.14.
15 July | 
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