Waiting For the Dollar To Fall Under Y90. By Nicholas Hastings
The credit crunch has turned the yen from a nine-stone weakling into the Incredible Hulk.
Instead of being the butt of carry trades - being hit because Japanese interest rates were too low as it was the case only a year ago - the yen is now going from strength to strength.
Its gains - which have pushed the dollar down from Y101 in April to nearly Y90 now - are being made despite the weakness of the Japanese economy itself.
At this rate, the dollar could soon be back down towards this year's low of Y87, which could attract the attention of the Bank of Japan as concern over Japanese export competitiveness rises.
For the moment, though, there appears to be little to stop the yen's advance.
Although interest in high-yielding currencies has returned, now that the global recovery is in place, the yen isn't suffering.
The reason is simple - the credit crunch has driven interest rates lower across the world and Japan's rates are no longer the lowest.
A similar shift is apparent in the Swiss franc. The franc has also been the butt of the carry trade that dominated currency markets before the global crisis erupted. But now, it too is doing well given that Swiss rates are no longer the lowest.
Some market analysts say the new nine-stone weakling could well be the dollar, with investors selling the U.S. currency in order to raise funds for higher-yielding asset markets.
For the yen, this means that rather than being damaged by news such as the latest downgrade to Japan's second-quarter growth estimate or the troubling 9.3% decline in machinery orders last month, the Japanese currency can benefit more from positive factors such as flows driven by exporters.
In fact, these flows could accelerate the yen's advance in the weeks to come as the end of the third quarter approaches.
Japanese exporters are not only expected to bring home far more profits than they would have in the past, given that the government waived a 40% tax on repatriated profits last April to help lift the economy.
There is also the key question of exporter hedging.
With the dollar showing little sign of bouncing back towards Y95 as many might have hoped, exporters could well find that they now need to move fast to hedge their positions before the dollar falls even more.
Throw in the fact that there are also a lot of option barriers around the Y90 level and the Japanese currency could find itself attracting even more support once it breaks through that level.
Early Monday in Europe, the threat of a trade war between China and the U.S. is damaging confidence in the global economic recovery and helping the yen and the dollar.
This new ripple of risk aversion sent the dollar down as far as Y90.18 but the U.S. currency has rebounded since, trading at Y90.61 at 0645 GMT just a little down from Y90.64 late Friday in New York, according to EBS.
The euro is down at Y131.69 from Y132.21 and at $1.4537 from $1.4582.
Instead of being the butt of carry trades - being hit because Japanese interest rates were too low as it was the case only a year ago - the yen is now going from strength to strength.
Its gains - which have pushed the dollar down from Y101 in April to nearly Y90 now - are being made despite the weakness of the Japanese economy itself.
At this rate, the dollar could soon be back down towards this year's low of Y87, which could attract the attention of the Bank of Japan as concern over Japanese export competitiveness rises.
For the moment, though, there appears to be little to stop the yen's advance.
Although interest in high-yielding currencies has returned, now that the global recovery is in place, the yen isn't suffering.
The reason is simple - the credit crunch has driven interest rates lower across the world and Japan's rates are no longer the lowest.
A similar shift is apparent in the Swiss franc. The franc has also been the butt of the carry trade that dominated currency markets before the global crisis erupted. But now, it too is doing well given that Swiss rates are no longer the lowest.
Some market analysts say the new nine-stone weakling could well be the dollar, with investors selling the U.S. currency in order to raise funds for higher-yielding asset markets.
For the yen, this means that rather than being damaged by news such as the latest downgrade to Japan's second-quarter growth estimate or the troubling 9.3% decline in machinery orders last month, the Japanese currency can benefit more from positive factors such as flows driven by exporters.
In fact, these flows could accelerate the yen's advance in the weeks to come as the end of the third quarter approaches.
Japanese exporters are not only expected to bring home far more profits than they would have in the past, given that the government waived a 40% tax on repatriated profits last April to help lift the economy.
There is also the key question of exporter hedging.
With the dollar showing little sign of bouncing back towards Y95 as many might have hoped, exporters could well find that they now need to move fast to hedge their positions before the dollar falls even more.
Throw in the fact that there are also a lot of option barriers around the Y90 level and the Japanese currency could find itself attracting even more support once it breaks through that level.
Early Monday in Europe, the threat of a trade war between China and the U.S. is damaging confidence in the global economic recovery and helping the yen and the dollar.
This new ripple of risk aversion sent the dollar down as far as Y90.18 but the U.S. currency has rebounded since, trading at Y90.61 at 0645 GMT just a little down from Y90.64 late Friday in New York, according to EBS.
The euro is down at Y131.69 from Y132.21 and at $1.4537 from $1.4582.
- 14 September |
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