International | Oct 12 2006
By Chris Shaw
The US dollar has done little against the euro for some months but over the same period has enjoyed gains against the yen as the Japanese economic recovery shows signs of being more drawn out than had previously been expected.
St George Bank has noted this, pointing out the slower recovery has lengthened the timeframe for further rate increases by the Bank of Japan (BoJ), removing one potential point of support for the yen. The bank also suggests the Korean nuclear issue is likely to prove a negative, so it has cut its estimates on the yen/US dollar rate to 116 for the December quarter, with a move to 112 by the middle of next year.
SVB Financial Group adds a few other reasons as to why the yen has been weak, with the carry trade being high among them given the ongoing interest rate differential between the US and Japan, which is only being accentuated by the BoJ delaying further rate rises.
Additionally it points out Japanese investors appear to have moved significant amounts of money offshore this year as a diversification measure, which has led to yen selling. At the same time, SVB suggests it is reasonable to suggest the oil price strength earlier this year was more damaging to the yen than to the greenback.
Despite this the group anticipates yen strength going forward as it sees the market as significantly short of the yen, particularly when external balances are factored in. It also anticipates increased volatility in currency markets next year, which it notes is usually a precursor to some unwinding of carry trade positions.
The likelihood of a slowdown in the US economy is also a positive for the yen in the group’s view, as it notes dollar weakness usually accompanies periods when US assets lose value or underperform in terms of relative returns. With the slowdown also expected to see the Federal Reserve cutting interest rates next year, SVB sees the outlook as supportive for the yen in the medium term.
The group is forecasting a yen/US dollar rate of 110 by year’s end (down from 100-105 earlier), with further gains to around 100 by the end of next year.
