LONDON (Dow Jones)--Hopes of a rise in Japanese interest rates and an unwinding of carry trades have lent the yen some brief support once again.
But, as before, the market remains unconvinced that the time for a significant yen recovery has come.
"Even in an environment of dollar weakness, the yen may prove the underperformer for now," said Daragh Maher, a senior currency strategist with Calyon Corporate and Investment Bank in London.
"Sustained yen strengthening is at present unlikely," Todd Elmer and Steve Saywell, currency strategists at Citigroup, said in a study concluding that the yens prospects remain weak.
This comes after a surprising upward jolt to yen sentiment as industrial production in Japan rose 1.6% in October instead of falling 0.4% as the market had forecast.
In itself, the news lent limited support to the Japanese currency. However, optimists immediately started to look ahead to the new machinery orders Dec. 8 and the next Tankan survey on Japanese business sentiment Dec. 15 for more positive news that will make a near-term Bank of Japan rate hike more likely.
"A significant bounce back in machine orders and a strong Tankan would sharpen the market focus on rate hikes," said Greg Gibbs, a currency strategist with ABN-Amro in Singapore.
"Even if inflation remains low, the Bank of Japan appears prepared to hike several times if it senses that (capital expenditure) remains at the high levels of the past two years," he added.
"This has the potential to cause a sharp unwinding of carry trades, that would cause the yen to rise and high yield currencies to fall, perhaps quite sharply," Gibbs continued.
Other analysts suggest, however, that such a scenario isnt about to emerge just yet.
Over the last week, the Japanese government has downgraded its own forecast for the economy and retail sales figures showed a much smaller than expected rise that once again put the strength of the domestic economy into doubt.
And, while the optimists may be looking at machinery orders and the Tankan for some help, the pessimists are expecting subdued core inflation, showing only a 0.1% rise on the year, and a downward revision to third-quarter gross domestic product numbers when they are released Dec. 8 to provide more evidence of why the Bank of Japan doesnt need to rush into a rate hike just now.
So, argues Derek Halpenny, senior currency economist with Bank of Tokyo-Mitsubishi, there is little reason for the industrial production numbers to change anything. Given the weakness of the Japanese consumer in the third quarter, the risks are that production in November and December will actually contract.
"This report is unlikely to change the markets appetite for selling the yen, ensuring continued weakness, probably against non-dollar currencies," Halpenny said.
The other key factor for the yens performance, of course, is the level of carry trades, which have been instrumental in keeping the yen lower for most of this year.
Although there have been reports that interest in the carry trade is fading as the markets appetite for global risk wanes, there is little evidence of a serious slowdown yet.
Calyons Maher pointed out that even the dollars recent dive hasnt changed things significantly.
"There is still no sign that carry is losing its allure in a significant way," he said. "The fact that the New Zealand and Australian dollars are already regaining ground lost to the yen suggests the rush for the door has not yet happened," he said.
However, Callum Henderson, head of foreign exchange strategy at Standard Chartered Bank in Singapore, does feel there are near-term risks to the current trend.
"From our perspective, leveraged funds that have on carry trades are entering increasingly dangerous territory," he said, pointing out that the risk/reward for holding on to carry trades that have done well so far this year is starting to deteriorate fast.
Henderson blames this largely on the sharp fall in the dollar, which has not only taken it through a 55-week moving average but is now targeting 200-week one at Y112.41. "Short-term momentum indicators remain bearish dollar/yen," he said.
Early Thursday in Europe, the dollar had slipped to Y116.11 from Y116.33 late Wednesday in New York, according to EBS. The euro was up at Y153.13 from Y153.100 as European officials continued to show minimal concern over the euros recent rally.
The euro advanced to $1.3189 from $1.3154.
But, as before, the market remains unconvinced that the time for a significant yen recovery has come.
"Even in an environment of dollar weakness, the yen may prove the underperformer for now," said Daragh Maher, a senior currency strategist with Calyon Corporate and Investment Bank in London.
"Sustained yen strengthening is at present unlikely," Todd Elmer and Steve Saywell, currency strategists at Citigroup, said in a study concluding that the yens prospects remain weak.
This comes after a surprising upward jolt to yen sentiment as industrial production in Japan rose 1.6% in October instead of falling 0.4% as the market had forecast.
In itself, the news lent limited support to the Japanese currency. However, optimists immediately started to look ahead to the new machinery orders Dec. 8 and the next Tankan survey on Japanese business sentiment Dec. 15 for more positive news that will make a near-term Bank of Japan rate hike more likely.
"A significant bounce back in machine orders and a strong Tankan would sharpen the market focus on rate hikes," said Greg Gibbs, a currency strategist with ABN-Amro in Singapore.
"Even if inflation remains low, the Bank of Japan appears prepared to hike several times if it senses that (capital expenditure) remains at the high levels of the past two years," he added.
"This has the potential to cause a sharp unwinding of carry trades, that would cause the yen to rise and high yield currencies to fall, perhaps quite sharply," Gibbs continued.
Other analysts suggest, however, that such a scenario isnt about to emerge just yet.
Over the last week, the Japanese government has downgraded its own forecast for the economy and retail sales figures showed a much smaller than expected rise that once again put the strength of the domestic economy into doubt.
And, while the optimists may be looking at machinery orders and the Tankan for some help, the pessimists are expecting subdued core inflation, showing only a 0.1% rise on the year, and a downward revision to third-quarter gross domestic product numbers when they are released Dec. 8 to provide more evidence of why the Bank of Japan doesnt need to rush into a rate hike just now.
So, argues Derek Halpenny, senior currency economist with Bank of Tokyo-Mitsubishi, there is little reason for the industrial production numbers to change anything. Given the weakness of the Japanese consumer in the third quarter, the risks are that production in November and December will actually contract.
"This report is unlikely to change the markets appetite for selling the yen, ensuring continued weakness, probably against non-dollar currencies," Halpenny said.
The other key factor for the yens performance, of course, is the level of carry trades, which have been instrumental in keeping the yen lower for most of this year.
Although there have been reports that interest in the carry trade is fading as the markets appetite for global risk wanes, there is little evidence of a serious slowdown yet.
Calyons Maher pointed out that even the dollars recent dive hasnt changed things significantly.
"There is still no sign that carry is losing its allure in a significant way," he said. "The fact that the New Zealand and Australian dollars are already regaining ground lost to the yen suggests the rush for the door has not yet happened," he said.
However, Callum Henderson, head of foreign exchange strategy at Standard Chartered Bank in Singapore, does feel there are near-term risks to the current trend.
"From our perspective, leveraged funds that have on carry trades are entering increasingly dangerous territory," he said, pointing out that the risk/reward for holding on to carry trades that have done well so far this year is starting to deteriorate fast.
Henderson blames this largely on the sharp fall in the dollar, which has not only taken it through a 55-week moving average but is now targeting 200-week one at Y112.41. "Short-term momentum indicators remain bearish dollar/yen," he said.
Early Thursday in Europe, the dollar had slipped to Y116.11 from Y116.33 late Wednesday in New York, according to EBS. The euro was up at Y153.13 from Y153.100 as European officials continued to show minimal concern over the euros recent rally.
The euro advanced to $1.3189 from $1.3154.
