Over the past fortnight we have seen the yen initially benefit from strong repatriation flows, which will be needed to rebuild tsunami-torn parts of the country. We then saw an unprecedented move from G7 central banks to intervene and stem the yen’s sharp appreciation (yen hit a post-war high vs the US dollar), which indeed it did. Intervening in the market has historically been unsuccessful in permanently redirecting a currencies momentum, but with the global coordination of this intervention, things will likely be different on this occasion. After all, Japan is the world’s third largest economy and the global recovery is fragile; if Japan suffers, we all suffer.
The yen has little going for it at present. Its growth prospects are poor, which means that its interest rates are extremely low, and the Bank of Japan showed last week that it will print money to boost the economy when necessary. The intervention confirms what we already knew- the BoJ will not allow the yen to appreciate any further. With uncertainty surrounding the effects of the national disaster on the Japanese economy, investors are likely to look elsewhere for safety, such as the ever-appealing Swiss franc or gold. Sterling has had an excellent 2011 against the yen and we do not see this trend reversing, even if market sentiment towards the UK economy is mixed to say the very least.
So what about the kiwi and aussie dollars? The kiwi is in a similar boat to the yen. With an underperforming economy and a recent rate cut, those brave enough to invest in riskier currencies are turning to more promising prospects such as the euro. We therefore see a continuation of the Kiwi’s underperformance for the foreseeable.
On the other hand, the Australian economy is by no means performing poorly, but there is a sense that the aussie may struggle to build upon the gains made in the past couple of years. The aussie has benefitted from aggressive monetary tightening, but this process has slowed and the likelihood is that we will see just one rate hike this year (less than the BoE and the ECB’s expectations for example). Combine this with prevailing risk adverse sentiment and the hit to Japan (Australia’s second largest export market) and we do not see the aussie dollar enjoying too much more appreciation this year.
Analyst – Caxton FX
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