Why The Yen May Not Be At Risk From Risk. By Gary Stride
In the normal course of events an increase in risk appetite would find the Japanese yen suffering due to its widespread use as a funding currency.
However that correlation, while not exactly dead, looks in terminal decline.
The carry trade is not what it used to be. The sharp drop in global interest rates has resulted in many of Japan's peers now offering only a fraction more on their deposits, so making the lure of using the yen as a funding currency less attractive.
On the same subject, the Swiss franc should be a much more attractive sell than the yen to fund any carry trade, as the Swiss authorities are dead against any strength in their currency due to deflationary risks and openly encourage weakness in the franc.
That leads me on to yen strength.
The market has held a long-term belief that the Japanese authorities are not happy with a dollar/yen rate below 95.00 and certainly not under 90.00 and would use the intervention tool to prevent such an occurrence.
Japanese exporters are also seen at risk when the dollar falls below Y95.
However, Barclays Capital notes that according to official Japanese data the break-even exchange rate for Japanese exporters in the 2008 financial year came in at Y97.30, the first time that the rate has been below Y100 since 1986.
This, says the bank, indicates a strengthening resilience to yen appreciation amid intensifying international competition, and while a rate of around Y94.00 will no doubt create problems for exporters, it should not immediately cut into profits.
But perhaps the biggest unknown for the yen lies in next week's Japanese elections, where Prime Minister Taro Aso's conservative party is widely expected to suffer a crushing defeat after being in power for most of the last 54 years.
BNP Paribas says Japan's opposition Democratic Party may score a runaway victory in the August 30 election, winning more than 300 of the 480 seats in the parliament's lower house.
The bank notes that the DPJ is not only promising to transform the economy to demand- rather than export-orientated, but is also likely to adopt a non-interventionist approach when it comes to the foreign value of the yen.
BNP says the prospect of intervention has prevented dollar/yen from falling through the floor, however this 'BoJ Put' might soon be withdrawn.
Around 0650 GMT Monday, the dollar was worth Y94.87, up from Y94.40 in late New York trade Friday. The pound was worth $1.6460, down from $1.6505, and the euro was down at $1.4305, from $1.4320.
However that correlation, while not exactly dead, looks in terminal decline.
The carry trade is not what it used to be. The sharp drop in global interest rates has resulted in many of Japan's peers now offering only a fraction more on their deposits, so making the lure of using the yen as a funding currency less attractive.
On the same subject, the Swiss franc should be a much more attractive sell than the yen to fund any carry trade, as the Swiss authorities are dead against any strength in their currency due to deflationary risks and openly encourage weakness in the franc.
That leads me on to yen strength.
The market has held a long-term belief that the Japanese authorities are not happy with a dollar/yen rate below 95.00 and certainly not under 90.00 and would use the intervention tool to prevent such an occurrence.
Japanese exporters are also seen at risk when the dollar falls below Y95.
However, Barclays Capital notes that according to official Japanese data the break-even exchange rate for Japanese exporters in the 2008 financial year came in at Y97.30, the first time that the rate has been below Y100 since 1986.
This, says the bank, indicates a strengthening resilience to yen appreciation amid intensifying international competition, and while a rate of around Y94.00 will no doubt create problems for exporters, it should not immediately cut into profits.
But perhaps the biggest unknown for the yen lies in next week's Japanese elections, where Prime Minister Taro Aso's conservative party is widely expected to suffer a crushing defeat after being in power for most of the last 54 years.
BNP Paribas says Japan's opposition Democratic Party may score a runaway victory in the August 30 election, winning more than 300 of the 480 seats in the parliament's lower house.
The bank notes that the DPJ is not only promising to transform the economy to demand- rather than export-orientated, but is also likely to adopt a non-interventionist approach when it comes to the foreign value of the yen.
BNP says the prospect of intervention has prevented dollar/yen from falling through the floor, however this 'BoJ Put' might soon be withdrawn.
Around 0650 GMT Monday, the dollar was worth Y94.87, up from Y94.40 in late New York trade Friday. The pound was worth $1.6460, down from $1.6505, and the euro was down at $1.4305, from $1.4320.
- 24 August |
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