Carry Unwind Reaps the Benefit from Yen
Global equity market declines allowed the Japanese yen to gain over the course of the week, but pairs like USD/JPY and GBP/JPY saw their sharpest moves on Friday on a flurry of carry trade unwinding news.
First, the yen benefited from news that the People's Bank of China will "strengthen the coordinated use of interest rates and the exchange rate to help stabilize expectations of inflation," suggesting that the country would allow the Chinese yuan to become more flexible and appreciate far more rapidly, as foreign governments, including the US, have been aggressively pushing for.
Also, the Nikkei closed down 1 percent on Friday, the sixth straight losing day – on reports that Mizuho Securities may have lost as much as 100 billion yen as a result of the problems in the US subprime mortgage market. As if it wasn't already clear before, the contagion of the US housing market collapse has the potential to spread not only throughout the US economy, but also into global financial markets as we've already seen exemplified in the UK with Northern Rock. Japan was previously thought to be relatively shielded from subprime risk, but evidence is starting to indicate otherwise and dramatically increases the downside risks for growth in the economy.
Looking ahead to this week, risk aversion will likely remain the primary driver for the Japanese yen. Last week we saw junk bond spreads widen quite a bit, highlighting just how jittery the markets have become.
Conditions such as these are not likely to fade quickly, creating the potential for additional carry trade unwinding and gains for the low-yielding yen. Economic data out of Japan may jive with such moves, as domestic CGPI and GDP figures are both expected to rise, suggesting that slowly percolating inflation pressures and economic growth will give the Bank of Japan more leeway to consider normalizing rates further.
As a result, the combination of risk aversion market-wide and fundamental impetus could push USDJPY down towards 108.00 by the end of the week.
First, the yen benefited from news that the People's Bank of China will "strengthen the coordinated use of interest rates and the exchange rate to help stabilize expectations of inflation," suggesting that the country would allow the Chinese yuan to become more flexible and appreciate far more rapidly, as foreign governments, including the US, have been aggressively pushing for.
Also, the Nikkei closed down 1 percent on Friday, the sixth straight losing day – on reports that Mizuho Securities may have lost as much as 100 billion yen as a result of the problems in the US subprime mortgage market. As if it wasn't already clear before, the contagion of the US housing market collapse has the potential to spread not only throughout the US economy, but also into global financial markets as we've already seen exemplified in the UK with Northern Rock. Japan was previously thought to be relatively shielded from subprime risk, but evidence is starting to indicate otherwise and dramatically increases the downside risks for growth in the economy.
Looking ahead to this week, risk aversion will likely remain the primary driver for the Japanese yen. Last week we saw junk bond spreads widen quite a bit, highlighting just how jittery the markets have become.
Conditions such as these are not likely to fade quickly, creating the potential for additional carry trade unwinding and gains for the low-yielding yen. Economic data out of Japan may jive with such moves, as domestic CGPI and GDP figures are both expected to rise, suggesting that slowly percolating inflation pressures and economic growth will give the Bank of Japan more leeway to consider normalizing rates further.
As a result, the combination of risk aversion market-wide and fundamental impetus could push USDJPY down towards 108.00 by the end of the week.
AUDNZD Technical Fundamental
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