Getting Ready To Deal With Yen Bulls? By Nicholas Hastings
We could be watching Japan build a trap for yen bulls.
With concern over the global recovery still rising and with global appetite for risk still falling, the yen is likely to remain in demand as a safe haven.
This isn't good news for Japanese exporters, who have watched a decline in the dollar down to nearly Y85 erode their profits in the last few months.
See the dollar's fall against the yen in recent months:
Pressure on the Japanese authorities to do something about the yen's strength is only likely to grow later this week as new data from Japan, including unemployment, consumer prices and household spending, will reinforce forecasts for continued slow growth and more deflation.
Also on Tuesday, the Nikkei Index fell under 9000 for the first time since May 2009 because of exasperation over the lack of policy response.
So far, though, there has been little concrete sign of action by either the government or the Bank of Japan and yen bulls have been getting bolder.
Direct market intervention by the Bank of Japan has been largely ruled out, given the accusations Tokyo would face from the U.S. of currency manipulation.
This is certainly something the Japanese authorities would want to avoid ahead of the next meeting of finance ministers from the Group of Seven nations early next month.
Meanwhile, there has been a lot of talk that the central bank will ease monetary policy instead. This is being seen as another, more diplomatic, means of weakening the yen.
Speculation over such a move has been rife over the last week with the Tokyo rumor-mill going into overdrive about a meeting between Prime Minister Naoto Kan and Bank of Japan Governor Misaaki Shirakawa.
In the event, the two are said to have held only a 15-minute telephone conversation that didn't cover foreign-exchange intervention.
This lack of policy action has only encouraged the view that there is no consensus between the government and the central bank over how to tackle the strong-yen issue.
With the risk of early official action apparently removed, the yen has become that much more attractive as a safe haven, and investors have pushed it a little higher.
The latest data from the Chicago Mercantile Exchange showed that although yen long positions may have been reduced a little in the week to last Tuesday, they remained close to historical highs.
Also, the increase in safe-haven demand that has taken place since last Tuesday means that there is a good chance that yen positions have been increased again.
And this could be just what the Japanese authorities want.
By boosting market confidence that nothing is imminent, and encouraging more investors to go long of the yen, the Bank of Japan could be building the element of surprise.
So if the central bank does decide to make an unexpected policy change, the yen could fall sharply, springing a trap that would squeeze long positions and push the Japanese currency much lower.
This would certainly help to explain the complete lack of coherent policy coming out of Tokyo despite the growing pressure from corporate Japan for action.
Early Tuesday in Europe, the dollar slipped a little more against the yen, falling to Y84.94 from Y85.25 late on Monday in New York, according to EBS, as global risk sentiment took another hammering.
Contributing to the deterioration are a disappointing performance in global stock markets, a warning by a newest member of the Bank of England monetary policy committee that there is a "significant" risk of the U.K. falling back into recession, and expectations of another sharp fall in U.S. existing home sales later in the day.
The euro fell to Y107.29 from Y107.95, at one stage hitting a 8-year 9-month low at Y107.21.
The euro was also down at $1.2635 from $1.2665.
With concern over the global recovery still rising and with global appetite for risk still falling, the yen is likely to remain in demand as a safe haven.
This isn't good news for Japanese exporters, who have watched a decline in the dollar down to nearly Y85 erode their profits in the last few months.
See the dollar's fall against the yen in recent months:
Pressure on the Japanese authorities to do something about the yen's strength is only likely to grow later this week as new data from Japan, including unemployment, consumer prices and household spending, will reinforce forecasts for continued slow growth and more deflation.
Also on Tuesday, the Nikkei Index fell under 9000 for the first time since May 2009 because of exasperation over the lack of policy response.
So far, though, there has been little concrete sign of action by either the government or the Bank of Japan and yen bulls have been getting bolder.
Direct market intervention by the Bank of Japan has been largely ruled out, given the accusations Tokyo would face from the U.S. of currency manipulation.
This is certainly something the Japanese authorities would want to avoid ahead of the next meeting of finance ministers from the Group of Seven nations early next month.
Meanwhile, there has been a lot of talk that the central bank will ease monetary policy instead. This is being seen as another, more diplomatic, means of weakening the yen.
Speculation over such a move has been rife over the last week with the Tokyo rumor-mill going into overdrive about a meeting between Prime Minister Naoto Kan and Bank of Japan Governor Misaaki Shirakawa.
In the event, the two are said to have held only a 15-minute telephone conversation that didn't cover foreign-exchange intervention.
This lack of policy action has only encouraged the view that there is no consensus between the government and the central bank over how to tackle the strong-yen issue.
With the risk of early official action apparently removed, the yen has become that much more attractive as a safe haven, and investors have pushed it a little higher.
The latest data from the Chicago Mercantile Exchange showed that although yen long positions may have been reduced a little in the week to last Tuesday, they remained close to historical highs.
Also, the increase in safe-haven demand that has taken place since last Tuesday means that there is a good chance that yen positions have been increased again.
And this could be just what the Japanese authorities want.
By boosting market confidence that nothing is imminent, and encouraging more investors to go long of the yen, the Bank of Japan could be building the element of surprise.
So if the central bank does decide to make an unexpected policy change, the yen could fall sharply, springing a trap that would squeeze long positions and push the Japanese currency much lower.
This would certainly help to explain the complete lack of coherent policy coming out of Tokyo despite the growing pressure from corporate Japan for action.
Early Tuesday in Europe, the dollar slipped a little more against the yen, falling to Y84.94 from Y85.25 late on Monday in New York, according to EBS, as global risk sentiment took another hammering.
Contributing to the deterioration are a disappointing performance in global stock markets, a warning by a newest member of the Bank of England monetary policy committee that there is a "significant" risk of the U.K. falling back into recession, and expectations of another sharp fall in U.S. existing home sales later in the day.
The euro fell to Y107.29 from Y107.95, at one stage hitting a 8-year 9-month low at Y107.21.
The euro was also down at $1.2635 from $1.2665.
Bloomberg TNI FRX POV
Reuters USD/DJ(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)
Thomson P/1066 or P/1074
- 24 August |
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