Yen Weakness Persists and New Zealand Dollar Jumps on Inflation

The yen fell on Monday to two-month lows against the pound and euro, and recovered only slightly from Friday's six-month low against the US dollar. Meanwhile, the New Zealand dollar surged midway through Tuesday's Asian session after upbeat news on inflation.

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Weakness in the Japanese yen continues.

The yen’s frailty in the wake of escalating trade tensions is a surprise to many in the market given the currency’s traditional status as a safe haven in times of economic uncertainty.

While one might consider a lack of yield to be among the principal reasons for yen selling (the yield on 10-year Japanese government bonds is barely above zero), yields have been a serious problem in Japan for more than two decades, so can be ruled out among causes.

Offering a reason for yen weakness last week was Deutsche Bank. One of DB’s FX strategists, Mallika Sachdeva, highlighted the return to the market of Japanese pension funds, which are buying near-record levels of foreign equities.

“We saw [similar] behaviour in the first quarters of 2015 and 2016, where pension fund buying increased when US stocks cheapened. A similar pattern has emerged this year with the value creation in the first quarter appearing to prompt risk addition in the second,” Sachdeva said.

The foreign “value creation” in question can be demonstrated by the approximate 10 percent declines in the S&P 500 (US), FTSE 100 (UK) and DAX 30 (Germany) between late January and the end of March.

Simply, as they exchange (or sell) their own currency in order to buy foreign currency-denominated assets, Japanese funds “are collectively holding the yen down even as more fundamental forces might normally cause it to appreciate,” explains the FT’s Leo Lewis.

As for what’s next for the yen, we can look to forecasts offered this week by ING, which foresees 110 per US dollar by mid-August, and from Citibank, which offers a rate of 114 in three months’ time. On Tuesday morning, USD/JPY was trading at 112.35.

In other news, the New Zealand dollar jumped midway through Tuesday’s Asian session when, to the surprise of traders, the RBNZ’s preferred inflation gauge (the sectoral factor model) came in at a seven-year high of 1.7 percent for the year ending June-30.

While there remains a near-zero probability that interest rates in New Zealand will be raised this year, traders can now be hopeful that the next move by the RBNZ won’t be a cut. The RBNZ had suggested in recent meetings that its next policy adjustment could go either way.

Earlier in the session, the kiwi had shown little interest in what was billed to be the biggest figure of the day, raw second-quarter CPI growth. At 0.4 percent, this measure of inflation was slightly below market expectations (the median estimate was 0.5 percent).

Between noon and 1pm in Tokyo, NZD/USD climbed 1 percent to 0.684, NZD/JPY rose 0.9 percent to 76.85 and NZD/AUD gained 0.7 percent to 0.92.


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