IB FX View

Japanese bond buying weakens yen

Thursday May 28, 2009

Just as Japanese investors turned bullish on overseas bond offerings, investors crushed bond prices sending yields to multi-month highs. The latest market move coincides with Ministry of Finance data showing the largest net inflow into overseas bonds by Japanese investors in six months as they added a net $6.6 billion to their fixed income portfolios. The decline in the yen is curious on the strength of the report. One news source notes that the buying reflects an improvement in economic conditions overseas, which reduces the safe haven demand for yen. However, that view flies in the face of the reality of a slide in bond prices, partly reflecting a similar recovery view. Accompanying Trade Ministry data showed continued weakness in domestic Japanese retail sales, albeit at a lower pace. The dollar initially rose sharply to 97.25 while the euro surged to 135.12.


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Some today speculate that the lure of overseas bonds puts the carry-trade firmly back in play. This means borrowing to sell short the yen and investing those proceeds into the assets of another nation through either holding the underlying currency or through diversifying into some other asset class within that nation.

Investors continue to scrape together evidence that the economic recovery will firm up. The British pound took a dent today after a lengthy reversal of fortune lifting it from $1.35 to above $1.30 versus the dollar during 2009. Bank of England policy-maker, David Blanchflower noted in an interview with London’s The Times newspaper, that he saw very little prospect of positive growth through 2010. Compounding his sentiment was the coincidental release of a CBI retail sales survey of some 80 retailers during May. A net reading of 17% saw lower sales for the month compared to a net 3% positive reading in April. Rising unemployment offers a stiff headwind to any revival in consumer spending habits. The pound declined to $1.5975 and against eth euro to 87.34 pennies.

Rising Eurozone confidence as evidenced by a European Commission survey of business and investor confidence for the month of May lifted the reading to 69.3 in May from 67.2 in April. That marks a six-month high for the measure and so helped raise the tone of euro appeal throughout Thursday’s session. The euro buys $1.3939 against the dollar this morning.

Commodity dollars continue to rebound against the U.S. unit with the Aussie now buying 78.34 U.S. cents and the Canadian buying 89.83 cents. The rise in these units makes sense despite a small broader-based dollar index rally given the fact that crude oil continues to climb.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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