Fed move fuels yen-funded trades
By Peter Garnham
Published: March 23 2007 11:23 | Last updated: March 23 2007 19:50
ft.com
The yen came under pressure this week as the Federal Reserve softened its tightening bias in the statement that accompanied its decision to leave US interest rates on hold at 5.25 per cent.
Equities rallied sharply after the announcement on Wednesday as investors took the view that the Fed seemed more ready to cut interest rates to combat risks to US growth.
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Analysts said the resulting slide in risk aversion improved the backdrop for carry trades, in which riskier high-yielding assets are funded by selling low-yielding currencies such as the yen and Swiss franc.
Sentiment for yen-funded carry trades was boosted further by comments from Toshihiko Fukui, governor of the Bank of Japan, who told a parliamentary committee in Tokyo that the central bank would keep Japanese interest rates, currently at 0.5 per cent, very low for some time and that any adjustments would be gradual.
The yen failed to get a lift from data on Thursday that showed Japanese average real estate prices rose 0.4 per cent on an annualised basis in January, their first rise since 1991.
David Woo at Barclays Capital said paradoxically the news could be negative for the yen.
“We believe that a rise in domestic asset prices could continue to stimulate Japanese investors’ risk appetites, which could bring the yen lower via an increase in capital exports,” he said.
Over the week, the yen fell 1.2 per cent to Y117.84 against the dollar, 1.1 per cent to Y156.72 against the euro and 2 per cent to Y231.20 against the pound.
Against the high-yielding Australian and New Zealand dollars, the yen fell 2.2 per cent to Y94.90 and 3.8 per cent to Y83.86 respectively.
The yen did briefly strengthen sharply on Tuesday, amid reports quoting Zhou Xiaochuan, the head of China’s central bank, as saying the country would stop stockpiling its large foreign exchange reserves.
The yen strengthened since, unlike the dollar, euro and sterling, it does not feature prominently in China’s $1,000bn stockpiles.
No official data are released on the make up of the reserves, but analysts estimate that about 70 per cent is held in dollars, with the remainder in euros and to a lesser extent sterling.
The reports referred to an interview with Mr Zhou in Emerging Markets magazine, the latest issue of which was released on Tuesday at a meeting of the Inter-American Development Bank in Guatemala.
Taimur Ahmad, editor of Emerging Markets, said the story had been distorted.
“The point Mr Zhou was trying to make is that the Chinese authorities going forward want to try to avoid a further build up in their forex reserves, in the same way that they also want their currency to appreciate gradually,” said Mr Ahmad.
“Mr Zhou never said China would stop buying foreign exchange.”
The dollar fell sharply after the Fed’s policy statement on Wednesday, falling to a two-year low of $1.3410 against the euro.
The dollar regained its poise as investors fully digested the statement, recognising that the central bank remained concerned over inflationary risks in the US economy.
“There is a growing recognition that any easing by the Fed will need a much weaker flow of data regarding [US] economic activity than that seen presently, especially in light of the elevated inflation backdrop,” said Ian Gunner, currencies strategist at Mellon Financial.
The dollar finished the week flat at $1.3310 against the dollar and rose 0.9 per cent to SFr1.2180 against the Swiss franc.
The dollar fell 1.1 per cent against the pound to $1.9615 as robust UK retail sales figures boosted expectations that the Bank of England would raise interest rates by 25 basis points at either its April or May policy-setting meeting.
The pound rose 1.1 per cent to £0.6778 against the euro over the week. |
