Jittery stock markets and the continuing debt crisis see investors opting for 'safe haven' currencies.
However, the impact of the strengthening Yen against the dollar has investors wondering what the Bank of Japan's next move will be. “The Japanese yen set record levels again last week against the US dollar and the Bank of Japan is watching the yen’s every move as needless to say the more the Japanese yen strengthens, the higher the likelihood that they will come in and intervene again," Chris Towner, director of FX Advisory Services at foreign currency specialist HiFX.
However, their objective at the moment doesn’t seem to be to turn the Japanese yen around as this may upset their G7 counterparts. Instead they seem to be approaching intervention by towing in the middle, helping the exporters and not stepping on the toes of other G7 countries so as not to be seen as a currency manipulator, according to HiFX.
"More recently we have seen Japan’s finance minister warning speculators against betting on further yen gains, stepping up their rhetoric somewhat about their concerns of a strong yen and the impact that this is having on exports. In the financial markets we know it is hard to fight the tide, let alone turn the tide; however if we do see USD/JPY start to turn higher, you can expect the Japanese will continue to promote a weaker yen until it gets to their point of a more neutral valuation between 95 and 100 JPY to the US dollar,” says Towner.
Meanwhile, given all the focus on the debt ceiling debate, the US dollar has strengthened as it remains the most liquid and most traded currency globally. As in 2008 when Lehman’s collapsed, it was the most sought after currency when times got really tough, points out Towner.
“It seems we are now experiencing an after-shock from the credit crisis in 2007/2008 as investor confidence remains sensitive to the global downside risks. In the currency markets the risk-on tap has now been fully turned off and the risk-off tap is in full flow. This is reflected in the recent weakness in the commodity currencies and investors are clawing for the safe havens of the Swiss franc and the Japanese yen. This has resulted in the central banks of Switzerland and Japan having to intervene to curb the rise of their currencies; however with limited options out there, it’s going to take a lot of firing power to buck the trend," says Towner.
Looking closer to home and at Sterling, yields on gilts are at record a low, which reflects investor’s confidence that the Government’s approach to reducing the debt is the right thing to do.
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