Further Yen Gains Won't Be Easy. By Nicholas Hastings
The yen has made it back up to levels last seen nearly two months ago but further gains could prove a struggle.
It's not only that investors may be a little nervous about just what the new Democratic Party of Japan administration will get up to but that yield spreads may soon start working more in favor of the dollar -helping to push the Japanese currency back down.
At the moment, there are certainly conflicting pressure on the yen.
For weeks, the currency has benefited from worries about the global recovery, with investors moving out of risky assets in favor of safe havens, such as Japan.
This upward trend could well intensify in the near-term, especially if the latest non-farm payrolls out of the U.S. throw up more concern about employment trends and if G20 finance ministers meeting in London this weekend fail to coordinate exit strategies.
The fact that the yen remains undervalued and that foreign demand for Japanese money market instruments remains strong contributes to the feeling that the yen's rally may not be over just yet.
The fact that senior officials in the new administration may be less worried about yen strength than their predecessors is also helping. The government said earlier this week that it is best to avoid currency intervention, the threat of which had helped to discourage investors from pushing the yen too close to Y90 to the dollar in the past.
But it is uncertainty over the DPJ's policy in other areas that could help to undermine the yen.
Although foreign investment flows into Japanese stocks remained positive up until last week, some analysts remain convinced that these flows will now reverse.
There is not only concern that the new government will be more profligate than its predecessor but that it may not be so keen in promoting the yen as an alternative reserve currency after all.
There had been some speculation before the election that DPJ may pursue a policy of reserve diversification that would have boosted the yen against the dollar. However, the new government was keen to stress earlier this week that preserving the dollar's key currency status is in Japan's favor given that the international transactions of so many Japanese companies are settled in the dollar.
But, it may well be the growing expectations of a global recovery and a shift in yield differentials back in favor of the dollar that does the yen's rally in.
Although 10-year yields in both the dollar and the yen markets can be expected to rise, dollar yields are likely to increase more.
"This would lead to a 25 basis point widening of the 10-year yield spread in favor of the U.S., which should be a positive for the dollar/yen in coming weeks," said the currency strategy team at Barclay's Capital in London.
So instead of the dollar continuing to fall towards Y90, chances are that it will go into reverse against the yen - heading back up to the Y100 target that Commerzbank still holds for the currency by the end of the year.
Early Friday in Europe, currencies were generally mixed with little direction as investors squared positions ahead o the latest U.S. non-farm payrolls and the long weekend holiday in the U.S.
Fear that payrolls may prove disappointing rose after initial jobless claims figures on Thursday came in a little higher than expected. Nevertheless, analysts were sticking to their forecasts for now with the consensus for a 233,000 fall in payrolls last month, following the 247,000 fall in July.
Equity markets were mixed with the Nikkei losing 0.3% but the Shanghai Composite gaining 0.6% and indicating the lack of clear direction.
By 0645 GMT, the dollar had slipped to Y92.66 from Y92.75 late on Thursday in New York, according to EBS. The euro was up at Y132.30 from Y132.20 and at $1.4276 from $1.4252.
It's not only that investors may be a little nervous about just what the new Democratic Party of Japan administration will get up to but that yield spreads may soon start working more in favor of the dollar -helping to push the Japanese currency back down.
At the moment, there are certainly conflicting pressure on the yen.
For weeks, the currency has benefited from worries about the global recovery, with investors moving out of risky assets in favor of safe havens, such as Japan.
This upward trend could well intensify in the near-term, especially if the latest non-farm payrolls out of the U.S. throw up more concern about employment trends and if G20 finance ministers meeting in London this weekend fail to coordinate exit strategies.
The fact that the yen remains undervalued and that foreign demand for Japanese money market instruments remains strong contributes to the feeling that the yen's rally may not be over just yet.
The fact that senior officials in the new administration may be less worried about yen strength than their predecessors is also helping. The government said earlier this week that it is best to avoid currency intervention, the threat of which had helped to discourage investors from pushing the yen too close to Y90 to the dollar in the past.
But it is uncertainty over the DPJ's policy in other areas that could help to undermine the yen.
Although foreign investment flows into Japanese stocks remained positive up until last week, some analysts remain convinced that these flows will now reverse.
There is not only concern that the new government will be more profligate than its predecessor but that it may not be so keen in promoting the yen as an alternative reserve currency after all.
There had been some speculation before the election that DPJ may pursue a policy of reserve diversification that would have boosted the yen against the dollar. However, the new government was keen to stress earlier this week that preserving the dollar's key currency status is in Japan's favor given that the international transactions of so many Japanese companies are settled in the dollar.
But, it may well be the growing expectations of a global recovery and a shift in yield differentials back in favor of the dollar that does the yen's rally in.
Although 10-year yields in both the dollar and the yen markets can be expected to rise, dollar yields are likely to increase more.
"This would lead to a 25 basis point widening of the 10-year yield spread in favor of the U.S., which should be a positive for the dollar/yen in coming weeks," said the currency strategy team at Barclay's Capital in London.
So instead of the dollar continuing to fall towards Y90, chances are that it will go into reverse against the yen - heading back up to the Y100 target that Commerzbank still holds for the currency by the end of the year.
Early Friday in Europe, currencies were generally mixed with little direction as investors squared positions ahead o the latest U.S. non-farm payrolls and the long weekend holiday in the U.S.
Fear that payrolls may prove disappointing rose after initial jobless claims figures on Thursday came in a little higher than expected. Nevertheless, analysts were sticking to their forecasts for now with the consensus for a 233,000 fall in payrolls last month, following the 247,000 fall in July.
Equity markets were mixed with the Nikkei losing 0.3% but the Shanghai Composite gaining 0.6% and indicating the lack of clear direction.
By 0645 GMT, the dollar had slipped to Y92.66 from Y92.75 late on Thursday in New York, according to EBS. The euro was up at Y132.30 from Y132.20 and at $1.4276 from $1.4252.
- 4 September |
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