LONDON (Dow Jones)--Is the yen about to repeat its October 1998 performance when a sharp reversal sent it soaring 10% in one day?
Highly unlikely.
The current unwinding of carry trades that is helping the yen stage a sharp rally is unlikely to last long - even if the Bank of Japan hikes rates as expected later this month.
The reason that yen gains will be limited? Weak private consumption will ensure that any rate hike this month will be the last for this year - leaving Japanese rates still low relative to those of Japans competitors and the yen still vulnerable to carry trades.
"The yen will remain the principal funding currency," said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi in London.
He said the Bank of Japans cautious monetary approach will be dictated by the weakness of private demand. "With private consumption likely to remain weak, underlying inflationary pressures are unlikely to intensify."
Lena Komileva, G7 economist with international brokers Tullet Prebon in London, also looks for carry to continue with investors still using the low-yielding yen as the funding currency for investment in higher-yielding assets elsewhere.
"Sharp profit-taking in Japanese equities and lower Japanese government bond yields are not consistent with a stronger yen and the chances are still that Bank of Japan tightening in 2007 will disappoint against market hopes, which means that carry trades will remain dominant," she said.
Of course, it is hard to subscribe to sentiments of this nature as speculation over the Bank of Japans intentions reaches fever pitch; a sharp slide in commodity prices triggers an unwinding of carry trades; and the temptation to take profits on the yens 6% fall against the dollar and 10% decline against the euro in the last six months appears nearly overwhelming.
"Whether the price action...constitutes a sea change in investors appetite for the trade or a brief hiatus is impossible to tell," said Neil Mellor, a senior currency strategist with Bank of New York in London.
Japanese Finance Minister Koji Omi only encouraged speculation that the Bank of Japan will raise its overnight call rate by another 0.25 basis points to 0.50 basis points at its next policy meeting that ends Jan. 18 by stating that the government wouldnt interfere with the central banks decision.
By the end of last week, the Japanese markets were pricing in a 75% chance that the bank will hike rates at the January meeting.
There might not have been much new in Omis comments, but they encouraged talk that Japanese investors might now prefer to repatriate some of their investments abroad - including at least part of the $786 million of Uridashi bonds that are expected to mature this month.
"It is thought that some of this might not be reinvested if Japanese rates rise," Stephen Barrow, chief currency strategist with Bear Stearns International in London. "However," he added, "we are skeptical that the rate gap is narrow enough just yet to cause this to happen to any significant extent."
But even without Uridashi repatriation, the New Zealand and Australian dollars found themselves being battered against the yen as investors took the opportunity of steep commodity price falls to pull out of these currencies.
Market sources reported "waves of stop-loss selling" as major Japanese banks pulled out not only of these commodity currencies but out the euro as well.
Bank of Tokyos Chertkow suggested that the yen was also ripe for profit-taking given that already extreme short yen positions had been further extended at the start of last week as speculators looked for the dollar to break even higher.
Also, he added, Japanese exporters had probably been poised to seize levels just above Y120.00 to increase hedge ratios at the same time that other Asian nations were about to complain about the unfair competitive advantage the yens weakness was providing Japanese exporters.
But, as far as Japanese economics is concerned there is little reason to justify the yen reversal. "We expect a (dollar) move back towards the Y120.00 level this month," Chertkow said.
For the moment, however, the yen continues to attract some support. Early Monday, as European trading got underway, the market remains focused on the chances of a Japanese rate hike this month.
At 0745 GMT, the dollar was down at Y118.28 from Y118.69 late Friday in New York, according to EBS. The euro was also down at Y153.88 from Y154.42, but virtually unchanged at $1.3010.
Sentiment towards the single currency wasnt helped by German retail sales figures that showed a 0.3% decline last month instead of the 1.0% increase that had been expected.
Bloomberg TNI FRX POV
Reuters USD/DJ
Telerate 1066 or 1074
Thomson P/1066 or P/1074)
Highly unlikely.
The current unwinding of carry trades that is helping the yen stage a sharp rally is unlikely to last long - even if the Bank of Japan hikes rates as expected later this month.
The reason that yen gains will be limited? Weak private consumption will ensure that any rate hike this month will be the last for this year - leaving Japanese rates still low relative to those of Japans competitors and the yen still vulnerable to carry trades.
"The yen will remain the principal funding currency," said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi in London.
He said the Bank of Japans cautious monetary approach will be dictated by the weakness of private demand. "With private consumption likely to remain weak, underlying inflationary pressures are unlikely to intensify."
Lena Komileva, G7 economist with international brokers Tullet Prebon in London, also looks for carry to continue with investors still using the low-yielding yen as the funding currency for investment in higher-yielding assets elsewhere.
"Sharp profit-taking in Japanese equities and lower Japanese government bond yields are not consistent with a stronger yen and the chances are still that Bank of Japan tightening in 2007 will disappoint against market hopes, which means that carry trades will remain dominant," she said.
Of course, it is hard to subscribe to sentiments of this nature as speculation over the Bank of Japans intentions reaches fever pitch; a sharp slide in commodity prices triggers an unwinding of carry trades; and the temptation to take profits on the yens 6% fall against the dollar and 10% decline against the euro in the last six months appears nearly overwhelming.
"Whether the price action...constitutes a sea change in investors appetite for the trade or a brief hiatus is impossible to tell," said Neil Mellor, a senior currency strategist with Bank of New York in London.
Japanese Finance Minister Koji Omi only encouraged speculation that the Bank of Japan will raise its overnight call rate by another 0.25 basis points to 0.50 basis points at its next policy meeting that ends Jan. 18 by stating that the government wouldnt interfere with the central banks decision.
By the end of last week, the Japanese markets were pricing in a 75% chance that the bank will hike rates at the January meeting.
There might not have been much new in Omis comments, but they encouraged talk that Japanese investors might now prefer to repatriate some of their investments abroad - including at least part of the $786 million of Uridashi bonds that are expected to mature this month.
"It is thought that some of this might not be reinvested if Japanese rates rise," Stephen Barrow, chief currency strategist with Bear Stearns International in London. "However," he added, "we are skeptical that the rate gap is narrow enough just yet to cause this to happen to any significant extent."
But even without Uridashi repatriation, the New Zealand and Australian dollars found themselves being battered against the yen as investors took the opportunity of steep commodity price falls to pull out of these currencies.
Market sources reported "waves of stop-loss selling" as major Japanese banks pulled out not only of these commodity currencies but out the euro as well.
Bank of Tokyos Chertkow suggested that the yen was also ripe for profit-taking given that already extreme short yen positions had been further extended at the start of last week as speculators looked for the dollar to break even higher.
Also, he added, Japanese exporters had probably been poised to seize levels just above Y120.00 to increase hedge ratios at the same time that other Asian nations were about to complain about the unfair competitive advantage the yens weakness was providing Japanese exporters.
But, as far as Japanese economics is concerned there is little reason to justify the yen reversal. "We expect a (dollar) move back towards the Y120.00 level this month," Chertkow said.
For the moment, however, the yen continues to attract some support. Early Monday, as European trading got underway, the market remains focused on the chances of a Japanese rate hike this month.
At 0745 GMT, the dollar was down at Y118.28 from Y118.69 late Friday in New York, according to EBS. The euro was also down at Y153.88 from Y154.42, but virtually unchanged at $1.3010.
Sentiment towards the single currency wasnt helped by German retail sales figures that showed a 0.3% decline last month instead of the 1.0% increase that had been expected.
Bloomberg TNI FRX POV
Reuters USD/DJ
Telerate 1066 or 1074
Thomson P/1066 or P/1074)
