Latest Specific Currency Report - Sterling Vs. Japanese Yen - 13/04/10
Sterling has been making good headway against the "safe haven" currencies as investors start to look toward an election outcome. Any outcome! The uncertainty surrounding the May vote has been a drag on sentiment for some time now, and with the announcement of an election date there is at least a light at the end of the tunnel. Meanwhile, the Euro has drawn most of the regional flak over the last few weeks as the Greek debt situation came to a head. The aid package announced over the weekend has given the single currency a boost, but other debt concerns persist in Portugal, Spain and Italy, and are likely to continue to weigh on the single currency. Despite the prospect of other national melt downs, investor risk appetite remains buoyant, and that has prompted a continued flow of funds out of the relative havens of the US dollar and Japanese Yen, and into riskier assets. This has allowed sterling to recapture the key 140.00 Yen barrier that was lost in February. The last few days have been spent consolidating those gains, and while we remain above 140.00 there is scope for further upside.
Looking further out, both the UK and Japan have credibility issues to resolve. If the next government (whoever that will be!) does not table a serious program addressing the budget deficit and national debt, sterling could resume the downtrend it has been mired in for the last two years. Andrew Balls, Head of European Investments at funds manager Pimco (and brother of chancellor Ed Balls) warned in his latest investment circular that a failure to "put its fiscal house in order could lead to pressure on the British pound".
Japan's finance minister Naoto Kan said on Monday that the economic outlook has improved significantly in recent months, pointing to rising stock prices and a weaker Yen. A weaker currency helps to boost exports as they become cheaper to foreign buyers. However, Japan's national debt is also viewed as a major problem. Ratings agency S&P said in January that it may cut the rating on Japan's government bonds, a move that would raise their cost of borrowing on newly issued debt. Japan's national debt stands at nearly 200% of GDP, compared with around 55% of GDP in the UK (excluding financial interventions) according to the CIA World fact book.
Latest Specific Currency Report - Sterling Vs. Japanese Yen - 02/03/10
Sterling fell from 142.00 to 136.00 last week, and promptly lost another three Yen when things got nasty yesterday. Not a good start to the week! A weekend poll showing a high probability of a hung parliament set the scene for a wobbly week, but it was no one factor that triggered the big slide. Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business.
That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Sentiment toward the pound has been deteriorating sharply in recent weeks, and any one of these news items were excuse enough to cause a stampede for the exit. An apparent improvement in manufacturing activity was completely ignored, and mixed mortgage data did nothing to contribute. Sterling fell the most against the high yielding currencies as investor risk appetite remained buoyant, and higher yields offered differentiation from the low rates available in the UK.
The technical outlook remains negative, and has taken on an ominous tack following the break of key technical support at 140.00. Since then the market has sold off sharply, and may continue to do so. Buyers of the Yen should consider covering any exposure at current levels to avoid further downside.
Latest Specific Currency Report - Sterling Vs. Japanese Yen - 27/01/10
Despite sterling's recent strength against most other currencies, it has declined against the Yen in January as concerns over possible monetary tightening in China help to drive investors away from higher risk currencies. Investors who had sold Yen and US dollars in exchange for "high yielders" are now reversing those positions, causing the Yen and Greenback to strengthen.
Another factor behind these moves is the dramatic stock market weakness that began on January 20th, wiping around 5% off the Dow Jones Index in three days. Just as we saw during the credit crisis in late 2008, investors flock toward these "safe haven" currencies when other asset prices fall. So it's primarily risk sentiment that's driving this market at present, whereas the dominant themes in other sterling crosses have been more focused on the UK's economic outlook relative to peers.
Yesterday's fourth quarter GDP figures confirmed that the economy crept out of recession at the end of 2009, but only managed 0.1% growth, well below the 0.4% most analysts were expecting. Sterling fell on the news. Sterling managed yet another bounce from the key 140.00 level in November, but went on to make a "lower high" at 150.00. So while the major support at 140.00 is holding for now, the highs are getting lower, which indicated an underlying downward pressure. Unless we see a dramatic catalyst for sterling strength we feel that this market is likely to trade lower over the short and medium term.
Latest Specific Currency Report - Sterling Vs. Japanese Yen - 11/12/09
The Yen rallied strongly towards the end of November as the stock market correction sent investors scurrying in search of safe havens. The Yen and US dollar were the main beneficiaries of this reallocation. As stock markets recovered and went on to make new highs it was therefore fairly predictable that these currencies would weaken again. The Sterling/Yen rate duly bounced off the key 140.00 support level that has featured so strongly in 2009. The Bank of England kept interest rates and the quantitative easing program on hold yesterday.
The technical outlook is mixed. We are cautiously optimistic for sterling's prospects as long as we can hold above that 140.00 level. A close below there would signal a likely deterioration.
Latest Specific Currency Report - Sterling Vs. Japanese Yen - 16/11/09
Last Wednesday's quarterly inflation report put sterling on the back foot, sending it lower against all the major currencies. It wasn't so much the data that hurt, since we already knew that inflation had declined to just 1.1% in September. Gloomy comments by governorMervyn Kingkept markets guessing over whether further quantitative easing is in the pipeline. "We have a completely open mind as to whether to do more asset purchases..." was the phrase that sterling took exception to. However, by Thursday the pound was bouncing back as the wider market decided that the comments were designed to avoid any further disappointment should the bank chose to extend the QE programme. That could be symptomatic of the general sterling trend lately. An initial kneejerk reaction to bad news/comment seems to be followed by a swift rebound as investors struggle to find new reasons to sell the pound.
As we noted in our last report, the sterling/yen chart resembles the sterling/US dollar chart because of similar relative weakness of the dollar and Yen this year. The rebound from 140.00 in October gives us reason for optimism here, and the fact that sterling has in a holding pattern for the last few weeks gives added confidence that the next big move should be up. We would revise this assessment if the interbank rate drops below 145.82. In the meantime a break above 153.24 would give sterling another boost, opening the way to the 2009 highs around 163.00.
Latest Specific Currency Report - Sterling Vs. Japanese Yen - 19/10/09
Long Term:
Last year's financial market turmoil saw two currencies benefit. The US dollar and the Yen. The dollar because it has always been regarded as a "safe haven" in difficult times, and the Yen because so many traders had borrowed the currency at low interest rates and sold it to buy higher yielding stuff like the Aussie dollar. As soon as the crisis emerged and the high yielders started to fall (sharply!) those traders dumped the risky high yielding stuff and piled back into the Yen in order to repay their loans. That was the so called "carry trade" unwinding. While the Yen and US dollar are distinctly different animals, it's interesting to note how similar the Sterling/Yen and Sterling/Dollar charts look. That's because both of those currencies have seen outflows since the stock markets hit rock bottom back in March. Investors are once again taking on risk, and that has been reflected through diminished demand for JPY and USD. Since June - August both dollar and Yen have been creeping higher against an extremely weak pound. We tested the 140.00 level in the last few weeks, and saw a strong reaction in the last few days.
Short Term:
Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" on Thursday morning. A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly.
There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.
The technical outlook looks better after last week's movement. 140.00 has been established as strong support, so we would become more concerned if the pound breaks below there.
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