RTTNews - Tuesday in Asia, the Japanese yen rose to new multi-week highs against its major counterparts as the global stock market sell-off triggered large scale unwinding of carry trade positions.
In carry trade, investors borrow money from Japan where the interest rate is low to buy high yielding assets in other countries. So, an unwinding of carry trades results in traders liquidating their investments and scrambling for yen to repay their yen-denominated loans, which pushes up the value of the Japanese currency.
The dollar and yen tend to gain ground relative to other currencies in times of uncertainty. But the yen becomes the currency of choice for its perceived safety, outperforming the dollar.
On concerns that the global economy will take a fairly long time to recover, investors across the Asia-Pacific region are seen pressing heavy sales today. The World Bank's prediction of a sharper contraction for the global economy had taken a toll on the European and the U.S. markets yesterday, and it is now the turn of the Asian markets to embark on a journey down south.
The Washington-based lender now forecasts the world economy to shrink 2.9% this year, larger than its earlier prediction of a 1.7% decrease. In a report released on June 11, the lender had predicted the economy to shrink close to 3% in 2009. Global GDP is forecast to rebound with 2% growth next year and 3.2% by 2011.
The World Bank expects developing economies to grow 1.2% this year, following 5.9% growth in 2008. The growth estimate for 2009 is much lower than the 2.1% expansion estimated in March. Following a slow growth in 2009, the bank sees a higher 4.4% growth in 2010 and 5.7% in 2011, albeit subdued relative to the strong performance before the current crisis.
Japan's Nikkei stock index fell over 3 percent today morning to its lowest intraday level in three weeks, after Wall Street tumbled overnight on rekindled economic jitters, while lower commodity prices and a stronger yen added to the broad-based decline.
The 225-issue Nikkei Stock Average lost 303.26 points, or 3.09 percent, from Monday to 9,523.01, falling into the 9,500 range for the first time since June 1.
The broader Topix index of all First Section issues on the Tokyo Stock Exchange was down 24.37 points, or 2.64 percent, to 898.11. It fell below 900 for the first time also in three weeks on an intraday basis.
Against the US dollar, the Japanese yen edged higher to 95.13 during early Asian deals on Tuesday. This set the highest point for the yen since June 1, 2009. The next upside target level for the Japanese currency is seen around 94.6. The dollar-yen pair closed Monday's North American session at 95.88.
The yen surged up to a 4-day high of 95.73 against the dollar yesterday after a government report showed that Japan's business confidence improved in the second quarter and demand for services rose in April, adding to signs the country's worst postwar recession is easing.
Pessimism about the economy among Japan's big manufacturers lessened notably in the second quarter of the year from the first three months, a closely watched survey revealed.
The business confidence index for large manufacturing companies rose to minus 13.2 in the second quarter from a record low of minus 66 in the first quarter, according to the latest business outlook survey by the Ministry of Finance. That was the biggest increase since the survey started in 2004.
At the same time, the gauge for non-manufacturers' confidence stood at minus 27.8, up from previous quarter's minus 42.6. Hence, the index for all industrial confidence improved to minus 22.4 from minus 51.3.
It is expected that recent improvements in production and exports backed business mood in the second quarter. The increase in the business confidence also strengthened expectations that the Bank of Japan's Tankan survey, due July 1, would show an improvement in corporate sentiment from its lowest level on record.
Given the improvements in some leading indicators, the Bank of Japan and the government had raised their economic assessment. On June 17, the government had said while the economy is in a difficult situation, signs of a pick up are seen in some areas. It had also said exports are showing signs of recovery, while industrial production is picking up.
In its latest monthly report of recent economic and financial developments, the BoJ said Japan's economic conditions have begun to stop worsening after deteriorating significantly. With regard to the financial conditions, the central bank said situations have generally remained tight, although there have been signs of improvement.
The Japanese unit that closed Monday's North American session at 132.95 against the European currency rose to a 4-week high of 131.63 during Tuesday's early Asian deals. If the Japanese currency gains further, 129.8 is seen as the next target level.
The yen that touched a 3-day low of 135.19 against the euro last week has gained around 3% since then.
Against the British pound, the Japanese currency climbed to 124.78 during today's early Asian trading. This set the highest mark for the yen since June 1, 2009. On the upside, 152.2 is seen as the next target level for the Japanese yen. The pound-yen pair closed Monday's trading at 156.77.
Yesterday, the yen hit a 4-day high of 156.46 against the sterling after a report from the property website Rightmove showed that house prices in the UK dropped in June, after rising consecutively in the preceding four months.
Adding to pound's slide, a recent study by the the Centre for Economics and Business Research revealed yesterday that U.K.'s business services sector will lose more than half of the jobs it gained during the last five years by 2013.
During early Asian deals on Tuesday, the yen advanced to a new multi-week high of 87.48 against the Swiss franc, compared to 88.29 hit late New York Monday. This may be compared to Monday's new multi-day high of 88.00. The franc-yen pair is presently trading at 87.72 with 87.1 seen as the next target level.
The yen strengthened more than 2% against the franc after it slipped to a 3-day low of 89.51 on Friday.
The Japanese yen also jumped to new multi-week highs against commodity-related currencies as oil prices extended their fall below $67 a barrel today.
In Asian deals, oil fell below $67 a barrel, after a fall of nearly 4 percent the previous day, as renewed worries over the uncertain outlook for major economies sparked a sell-off across global equity markets.
The yen strengthened to new multi-week highs of 82.36 against the Canadian dollar and 74.39 against the Aussie during Asian deals on Tuesday. If the yen gains further, it may likely target 80.9 against the loonie and 72.0 against the Aussie. The loonie-yen pair closed trading at 83.04 and the aussie-yen pair at 75.36 on Monday.
In Asian trading on Tuesday, the yen soared to a new multi-week high of 59.59 against the NZ dollar. The next upside target level for the Japanese currency is seen at 59.6. The kiwi-yen pair was worth 60.35 at yesterday's close.
In the European session, the German July GfK consumer confidence index, Swiss May trade balance, French June consumer confidence index are expected to drive deals.
From the U.S., the National Association of Realtors is scheduled to release its report on existing home sales for May at 10 am ET. Economists estimate existing home sales of 4.83 million for the month.
The Federal Reserve Open Market Committee is scheduled to meet today and tomorrow to discuss the near-term direction of monetary policy, and the monetary policy-setting arm of the Fed will make an announcement at 2:15 PM ET on Wednesday.
At its April meeting, the Fed maintained its key fed funds target rate unchanged at a range of 0%-0.25%. The FOMC noted that the economy continued to contract, with the pace of contraction slowing somewhat. Despite the stabilization in consumer spending, the committee noted that spending continued to be constrained by job losses, lower housing wealth and tight credit.
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