The yen climbed strongly this week as currency speculators retreated from carry trade positions.
The Japanese currency climbed against higher yielding currencies as investors looked for safe havens amid the turbulence in equity markets. The yen carry trade, where the low-yielding currency is sold to purchase riskier, high-yielding assets, proved a popular investment strategy in the first half of 2007 as stable equity market conditions ensured a healthy appetite for risk.
But the deepening financial market gloom since August has seen carry trades scaled back since the beginning of this year.
The real test of carry trade activity is the relationship between the yen and the New Zealand dollar. The yen fell 15 per cent against the Kiwi between January and August last year as the latter’s interest rate hit 8.25 per cent against Japan’s 0.5 per cent. But the Kiwi has since lost nearly all these gains, and was down 4 per cent this week to Y82.05 as the yen continued its rally.
Derek Halpenny at Bank of Tokyo Mitsubishi UFJ said: “The prospects for a sustained sell-off of the yen in the current financial market climate of uncertainty remain very slim.”
Pressure remained on high-yielding currencies this week as the top US investment banks reported the extent of their exposure to subprime losses while bond insurance companies were threatened with ratings downgrades, which deepened investor concerns.
“A new wave of the credit crunch could be upon us and the turmoil continues to have a notable impact on Japan,” Mr Halpenny added.
The yen climbed 1.4 per cent against the dollar this week to Y107.31, gained 2.1 per cent versus the euro to Y157.45 and was up 2.1 per cent against the Australian dollar to Y94.82.
Sterling fell on Friday after soft retail sales data added to the likelihood of a cut in UK interest rates at the next policy meeting in February.
December retail sales fell 0.4 per cent, worse than an expected 0.2 per cent month-on-month rise. This took year-on-year sales growth down to 2.7 per cent, the lowest since September 2006.
The main weakness in the report, a 4.3 per cent drop in sales at “non-specialised” stores reflected the slowdown in discretionary spending by consumers.
“The fact that this number has come in so shy of expectations is testament to how the UK consumer is buckling under the combined effects of rising food and energy bills, increasing credit costs, flat wages and negative wealth effects from housing and equity markets,” said Daragh Maher at Calyon.
The pound fell 0.5 per cent against the dollar on Friday to $1.9595, and was 0.5 per cent weaker against the euro at £0.7474. But sterling was stronger against both currencies over the week. Indications the European Central Bank was set to ease back from its hawkish stance followed data showing tightening credit standards to businesses and homebuyers.
Martin van Vliet at ING said: “The ongoing tightening of bank credit standards provides strong ammunition for the doves on the ECB’s governing council to continue to block calls for higher interest rates.”
Over the week, the euro fell 1 per cent against sterling, and was also 0.7 per cent weaker against the dollar at $1.4672.
Although the dollar gained support on Friday after the White House announced measures it hoped would boost the ailing US economy, the US currency was down over the week as recession fears kept minds focused on the likelihood of aggressive interest rate cuts.
The dollar fell 0.2 per cent over the week to $1.9595 against sterling.
