Forex - Yen stays well bid amid nervousness in carry trades
LONDON (AFX) - The yen continued to find good support in the European trading session, firming to levels not seen since mid-December against the euro, dollar and pound, as carry trades continued to unwind.
The unwinding of carry trades — when investors borrow in low-yielding currencies to invest in higher yielding assets elsewhere — has been supporting the yen all week amid a drop in risk appetites.
Daniel Katzive at UBS said “carry trades appear to remain under stress” despite mixed data out of Japan last night.
He noted the risk level as measured by the UBS Forex Risk Index remains pretty much at lows seen yesterday.
As carry positions are believed to remain quite stretched, “we think that the big carry trade unwind has further to run,” he said.
It was notable that there has been a perceptible change in Japanese rhetoric on carry trades. Hiroshi Watanabe, vice finance minister for international affairs and who’s in charge of forex intervention, estimated the size of the yen carry trade at several tens of trillions of yen, and said that he expected the Japanese central bank to continue normalising interest rates.
“In the past, Watanabe has downplayed the significance of the yen carry trade so his comments are bullish for yen,” said Katzive.
Meanwhile, data out of Japan today was mixed. Core inflation for January was in line with expectations, while the jobless rate for the same month improved slightly, while household spending was well above expectations.
“On balance the data was slightly better than expected, but not enough to justify a shift in Bank of Japan expectations or an acceleration of carry trade unwinds,” said Katzive.
Stock market nervousness was again evident today, with Wall Street opening lower despite the 1 pct rise chalked up on the Shanghai composite index. Still, with much of the US trading session left to run today and yesterday’s stronger-than-expected US ISM survey, the dollar may well stay stable.
HBOS currency analyst Steve Pearson said the strong ISM figure has tempered some of the market’s recent worries over the outlook for global growth, noting that major US stock markets closed only marginally lower and Asian markets have been steady overnight.
“Some stability and calm has crept into markets. The stronger than expected US ISM manufacturing report appears to have allayed market nervousness over the outlook for global growth,” he said.
A light event and data calendar until the second half of next week makes it likely that risk appetite will recover for the time being, although underlying global economic worries remain, he said.
“It now seems likely that investor risk appetite rebuilds a little near-term, pressuring both the yen and the dollar,” Pearson said.
Meanwhile, against the euro, the dollar continued to benefit from yesterday’s solid US data, rising to week-highs against the European currency as markets awaited today’s University of Michigan consumer sentiment data and a speech later today by Federal Reserve chairman Ben Bernanke.
The pound was also trading at week lows against the dollar, as well as being slightly weaker against the euro, as it reversed some of its solid gains yesterday on the back of strong surveys on UK manufacturing and the retail sector.
London 1455 GMT London 0957 GMT
US dollar
yen 117.10 down from 117.46
sfr 1.2206 down from 1.2246
cad 1.1713 down from 1.1741
Euro
usd 1.3173 up from 1.3153
stg 0.6775 up from 0.6739
yen 154.21 down from 155.54
sfr 1.6085 down from 1.6109
Sterling
usd 1.9444 down from 1.9514
yen 227.77 down from 229.29
sfr 2.3933 up from 2.3922
Australian dollar
usd 0.7828 unchanged 0.7828
stg 0.4020 up from 0.4011
yen 91.67 down from 91.98
sivakumar.sithraputhran@thomson.com
ss/jag
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