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Mmn, that’s surprisingly sweet to the Yen. A few sources of news on this piece here.

The Japanese currency strengthened to near 118.0 against the dollar on Thursday and reversed Wednesday’s heavy losses against the Euro as volatility remained very high. The Japanese currency strengthened through the 118.0 barrier in Asian trading on Friday as Asian stock markets continued to weaken with markets looking at important dollar support near 117.50. The dollar attempted to stabilise close to 118.0.

Credit fears increased sharply again following the announcement that redemptions from three European funds would be suspended. Market caution will persist in the short term, especially as investors were hoping that market conditions were starting to normalise on Wednesday. The net impact is likely to be a sustained reduction in aggressive positioning which will provide important yen protection and a disorderly capitulation of trades could push the yen sharply stronger

There will be reduced expectations of an August Bank of Japan interest rate increase which will curb yen support if carry trades stabilise, but the extent of global credit fears will remain dominant in the short term

Source: Investica

Aug. 13 (Bloomberg) — The yen traded near a four-month high against the New Zealand dollar on speculation sharper swings in exchange rates will spur traders to reduce riskier investments.

The yen gained versus all 16 most-active currencies in the past week as investors cut holdings of higher-yielding assets funded by Japanese loans, known as carry trades, as losses related to U.S. subprime mortgages caused a credit squeeze. New Zealand’s dollar and Brazil’s real, favorites for carry trades, dropped the most. A measure of yen volatility rose to near the highest in 15 months.

“Volatility is at a high level, so this makes it hard to resume carry trades,” said Nobuaki Tani, a client manager of the Market Trading Office at Resona Bank Ltd. in Tokyo. “The yen may be bought.”

The yen was at 161.95 per euro at 7:50 a.m. in London from 162.13 late in New York on Aug 10. Japan’s currency traded at 118.34 per dollar from 118.40. It may gain to 161.50 per euro and 117.80 versus the dollar today, Tani said. Currency movements may be exaggerated by O-bon holidays, when Japanese often take week- long vacations to honor ancestors.

Volatility on one-month dollar-yen options reached 10.90 percent, close to 10.95 percent on Aug. 10, the highest since May 2006. Rising volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.

High Yielders

The New Zealand dollar fell for a third day against the yen, by 0.4 percent to 87.87 yen from 88.24 yen. It reached 86.78 yen on Aug. 10, the weakest since April 19. Australia’s dollar, another favorite of the carry trade, rose 0.4 percent to 100.33 yen from 99.98 yen after its central bank forecast core inflation will quicken to 3 percent by December.

Japan’s 0.5 percent interest rate allowed investors to borrow yen and buy higher-yielding currencies. The benchmark rate is 6.50 percent in Australia and 8.25 percent in New Zealand.

The risk of owning European corporate bonds rose, according to traders of credit-default swaps. Contracts on the iTraxx Europe Index of 125 companies, a benchmark for the cost of protecting investment-grade bonds against default, rose 3 basis points to 48 basis points, according to JPMorgan Chase & Co. An increase indicates worsening perceptions of credit quality.

The yen also gained on speculation investors will trim carry trades after a government report showed Japan’s economic growth slowed more than expected by analysts in the second quarter, making traders more reluctant to place riskier bets.

“Further carry trade liquidation will continue to support the yen,” said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. The yen may rise to 117.50 per dollar in the coming weeks, she said.

Japan Deflation

Gains in the yen may be limited by a government report today that showed the world’s second-largest economy hasn’t fully emerged from deflation, diminishing the likelihood the Bank of Japan will raise interest rates next week.

“The data may cause the BOJ to postpone hiking rates this month, especially amid global credit market concerns,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “It’s a bit negative for the yen,” which may decline to 118.70 against the dollar and 162.30 per euro today, he said.

Japan’s gross domestic product deflator, a broad measure of price changes, fell 0.3 percent in the second quarter from the same period a year ago, the Cabinet Office said today in Tokyo.

The economy expanded an annualized 0.5 percent in the second quarter, from a revised 3.2 percent in the first, the Cabinet Office also said. The median estimate of 27 economists surveyed by Bloomberg News was for a 0.9 percent increase.

U.S. Economy

The dollar may weaken on speculation losses on U.S. subprime loans will weigh on the housing market and slow economic growth, leading to lower interest rates.

U.S. data this week may show slowing industrial production, construction of new homes and manufacturing in the New York and Philadelphia regions, according to Bloomberg News surveys of economists. The dollar has fallen 4.5 percent against the yen and 1.6 percent against the euro since June 22, when Bear Stearns Cos. proposed to bail out hedge funds that lost money on securities related to subprime mortgages.

The Federal Reserve said Aug. 7 inflation remains “the predominant risk” after leaving rates at 5.25 percent. Interest- rate futures show traders see a 98 percent chance policy makers will cut the overnight rate for loans between banks to 5 percent at the next meeting on Sept. 18, from 46 percent a week ago.

“There’s a risk the U.S. economy doesn’t return to its potential growth rate and that’s not good for the dollar,” said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo. “Many people are calling for a rate cut, but the Fed still believes the underlying economy is strong. That may lead to a delay in lowering rates, which would contribute to market instability.”

The dollar may fall to 117.70 yen today, he said.

Source: Bloomberg.com

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