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Yen May Be A Good Bet On Dips. By Nicholas Hastings.
LONDON (Dow Jones)--The yen's latest downturn could well prove to
be a good buying opportunity.
The latest fillip in global risk appetite - driven by surprisingly good economic news from both the U.S. and Japan - have helped to put low yielders like the yen under
selling pressure again.
However, unless this spells an end to the recent concerns over the global economy, risk appetite will more than likely fall back again, triggering a fresh wave of yen
buying as carry trades are reversed again.
"For the current trends to persist, the good news flow must surely continue to come thick and fast," argues Neil Mellor, a senior currency strategist with Bank of New
York Mellon in London.
"Otherwise," said Mellor, "we strongly suspect that they will simply constitute (yen buying) opportunities for investors whose deepest fears over the global outlook are
unlikely to be fully assuaged for some time to come."
The latest downward jolt in the yen, which has pushed it through key resistance levels on some crosses, came as a surprisingly strong rise in U.S. retail sales last
month was followed by an expectedly high rise in GDP growth in Japan in the fourth quarter of last year.
The U.S. data, showing sales rising by 0.3% instead of falling 0.4%, has encouraged the view that the U.S. is avoiding a recession after all and that recent monetary
and fiscal easing will prove enough to ensure recovery.
Likewise, Japanese GDP growth coming at 0.9%, more than double the 0.4% that had been forecast, not only lowered any expectations of a recession in Japan but appeared
to erase any suggestion that the Bank of Japan will have to cut interest rates.
"The surge in GDP at the end of 2007 supports our view that rather than heading for recession, Japan will be the only major economy to grow at least as quickly this
year as last," said Julian Jessop, chief international economist with Capital Economics in London.
Lindsay Coburn, an independent consultant with ING Financial Markets, said that the bank "expects the next move in the Bank of Japan policy rate to be a 25 basis point
hike delivered in the March quarter of 2009."
However, it wasn't the improvement in Japan's economic outlook or the reduced chances of a rate cut that was driving the yen.
Instead, once again the shift in global appetite for risk remained firmly in the driving seat with the Japanese currency sold down across the board as investors became
more relaxed about higher yielding assets and bought them at the expense of lower yielding ones.
"The move higher in the dollar/yen is understandable," said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ in London.
"A good gauge of carry attractiveness - the yield per unit of volatility - is turning higher as yen volatility declines," Halpenny added.
The strength of the move was particularly apparent in the yen's fall against the pound, with sterling breaking through resistance at Y212.85 to trade well over Y213.00.
Sue Trinh, senior currency strategist with RBC Capital Markets in Sydney, suggested that this and breaks on other crosses could well see the yen extending its losses.
Against the dollar, however, the yen's decline might be more limited.
"We maintain that any move higher (in dollar/yen) will be a slow grind with Japanese exporter orders likely to cap upside momentum," Bank of Tokyo's Halpenny said.
Technically, the dollar's rise against the yen also looks weak.
According to Nicole Elliott, technical analyst with Mizuho Corporate Bank in London, the dollar's rise over Y108.00 is "looking like a small 'spike high' or 'false
break'".
She recommends putting on a tiny short at Y108.35 with a stop at Y108.70.
Although a downturn in risk appetite will obviously be the primary factor dictating how, if, and when the yen finds itself back in favor, other elements could well come
in to play as well.
Callum Henderson, head of foreign exchange strategy in Singapore, noted that carry-related interest may be keeping the yen under pressure now, "we think that slowing
outflows and repatriation ahead of the fiscal year-end on March 31 should lead to further modest dollar/yen weakness over the next month."
After an initial slide on Federal Reserve Chairman Ben Bernanke's admission Thursday that the U.S. economy could remain under pressure, the dollar was bouncing back a
little in places early Friday in Europe.
At 0818 GMT, it is up at Y108.24 from Y107.97 late on Thursday in New York.
Indications that risk appetite remains fairly strong came from a rise in the euro to Y158.65 from Y158.02. The single currency is also up at $1.4652 from $1.4636.
The pound is also up at Y213.07 from Y212.57.
The latest fillip in global risk appetite - driven by surprisingly good economic news from both the U.S. and Japan - have helped to put low yielders like the yen under
selling pressure again.
However, unless this spells an end to the recent concerns over the global economy, risk appetite will more than likely fall back again, triggering a fresh wave of yen
buying as carry trades are reversed again.
"For the current trends to persist, the good news flow must surely continue to come thick and fast," argues Neil Mellor, a senior currency strategist with Bank of New
York Mellon in London.
"Otherwise," said Mellor, "we strongly suspect that they will simply constitute (yen buying) opportunities for investors whose deepest fears over the global outlook are
unlikely to be fully assuaged for some time to come."
The latest downward jolt in the yen, which has pushed it through key resistance levels on some crosses, came as a surprisingly strong rise in U.S. retail sales last
month was followed by an expectedly high rise in GDP growth in Japan in the fourth quarter of last year.
The U.S. data, showing sales rising by 0.3% instead of falling 0.4%, has encouraged the view that the U.S. is avoiding a recession after all and that recent monetary
and fiscal easing will prove enough to ensure recovery.
Likewise, Japanese GDP growth coming at 0.9%, more than double the 0.4% that had been forecast, not only lowered any expectations of a recession in Japan but appeared
to erase any suggestion that the Bank of Japan will have to cut interest rates.
"The surge in GDP at the end of 2007 supports our view that rather than heading for recession, Japan will be the only major economy to grow at least as quickly this
year as last," said Julian Jessop, chief international economist with Capital Economics in London.
Lindsay Coburn, an independent consultant with ING Financial Markets, said that the bank "expects the next move in the Bank of Japan policy rate to be a 25 basis point
hike delivered in the March quarter of 2009."
However, it wasn't the improvement in Japan's economic outlook or the reduced chances of a rate cut that was driving the yen.
Instead, once again the shift in global appetite for risk remained firmly in the driving seat with the Japanese currency sold down across the board as investors became
more relaxed about higher yielding assets and bought them at the expense of lower yielding ones.
"The move higher in the dollar/yen is understandable," said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ in London.
"A good gauge of carry attractiveness - the yield per unit of volatility - is turning higher as yen volatility declines," Halpenny added.
The strength of the move was particularly apparent in the yen's fall against the pound, with sterling breaking through resistance at Y212.85 to trade well over Y213.00.
Sue Trinh, senior currency strategist with RBC Capital Markets in Sydney, suggested that this and breaks on other crosses could well see the yen extending its losses.
Against the dollar, however, the yen's decline might be more limited.
"We maintain that any move higher (in dollar/yen) will be a slow grind with Japanese exporter orders likely to cap upside momentum," Bank of Tokyo's Halpenny said.
Technically, the dollar's rise against the yen also looks weak.
According to Nicole Elliott, technical analyst with Mizuho Corporate Bank in London, the dollar's rise over Y108.00 is "looking like a small 'spike high' or 'false
break'".
She recommends putting on a tiny short at Y108.35 with a stop at Y108.70.
Although a downturn in risk appetite will obviously be the primary factor dictating how, if, and when the yen finds itself back in favor, other elements could well come
in to play as well.
Callum Henderson, head of foreign exchange strategy in Singapore, noted that carry-related interest may be keeping the yen under pressure now, "we think that slowing
outflows and repatriation ahead of the fiscal year-end on March 31 should lead to further modest dollar/yen weakness over the next month."
After an initial slide on Federal Reserve Chairman Ben Bernanke's admission Thursday that the U.S. economy could remain under pressure, the dollar was bouncing back a
little in places early Friday in Europe.
At 0818 GMT, it is up at Y108.24 from Y107.97 late on Thursday in New York.
Indications that risk appetite remains fairly strong came from a rise in the euro to Y158.65 from Y158.02. The single currency is also up at $1.4652 from $1.4636.
The pound is also up at Y213.07 from Y212.57.
15 February | 
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