By S. White and R. Harui, Bloomberg
Tokyo: The yen snapped a three-day rally against the dollar and the euro as Japanese stocks rebounded from five days of losses, suggesting investor risk appetite may return.
A sell-off in global equities that started last week yesterday lifted the yen against all 16 most-active currencies as investors exited trades where the borrow yen cheaply to purchase assets with higher yields. Signs that stocks are stabilizing may show more tolerance for currency risk.
“The rise in the Nikkei is leading to yen selling,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. “The yen had been bought as declines in global stocks suggested investors were wary of riskier assets. This logic is working in reverse.”
Japan’s currency dropped to 116.07 against the dollar at 11 a.m. in Tokyo, from 115.53 in New York yesterday, when it touched 115.15, the strongest since 8 December. It slid to 151.96 per euro from 151.22, after reaching 150.76, the highest since 24 November. It may fall to 116.30 against the dollar and 152.30 per euro today, according to Ishikawa.
The Nikkei 225 Stock Average added 1 % and the broader Topix index 1.3 % after yesterday posting the biggest declines since June. Asian shares snapped a four-day losing streak, with the Morgan Stanley Capital International Asia Pacific Index of leading regional stocks rising 1.1 %.
Losses in the yen may accelerate should it weaken beyond 116.25 against the dollar, where traders have placed sell orders, said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. Investors often leave automatic orders in case bets go wrong.
The yen today weakened against all 16 major currencies. Against the pound, it dropped to 223.33 from 221.88 yesterday, down from a five-month high of 221.12. It fell to 89.69 versus the Australian dollar from 89.00 and to 78.53 per New Zealand dollar from 77.92.
Japan’s borrowing costs are the lowest in the industrialized world at 0.5%. Rates in the UK are 5.25%. The benchmark rate is 6.25% in Australia and 7.25% in New Zealand.
Volatility on one-month yen options stood at 9.5%, down from 9.7 % yesterday, the most since 5 June. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options. Lower volatility may encourage carry trades as it exposes those bets to less currency risk.
“Volatility pushed up to levels that just couldn’t be sustained,” said Glenn Wittingslow, head of the foreign-exchange options desk at St.George Bank Ltd. in Sydney. “Moderate strength in equity markets in the next 24 hours will bode well for the dollar-yen” and push it to 116.75.
Unwinding Is Done
Losses in the yen may accelerate on speculation a decline in Japan’s short-term money-market rates shows demand to borrow the currency has slumped, signaling speculators may have finished unwinding carry trades.
Japan’s overnight call rate, the weighted average of overnight loans between financial institutions, fell to 0.46 % today from a 10-year high of 0.72 % on 28 February.
“The overnight call rate has declined, mainly due to weaker fund demand from foreign banks,” said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. “This means the unwinding of yen carry trades is already done.”
Japan’s currency may fall to 120 per dollar by the end of March, he said.