Monday February 28, 2005 - 11:26:19 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar focus back on Asia
The yen strengthened against the dollar on Monday with a move to a high of 104.5 following the Japanese data and the US currency subsequently extended gains to 104.3.
Japanese industrial production rose by a stronger than expected 2.1% for January compared with expectations of a 1.8% increase. The positive impact on the yen was offset slightly by the fact that the Finance Ministry is expecting declines for February and March. The retail sales and PMI data were, however. also generally firm. There is likely to be greater confidence that the Japanese economy is now on an improving trend and this will offer support to the Japanese currency, although sentiment could switch again rapidly. The Nikkei index hit an 8-month high on Monday with a 0.7% daily increase and investment flows should remain strong in the short term. Capital repatriation is also a high risk during March.
The Chinese yuan issue will remain important for the markets. The Chinese authorities have announced measures to give greater freedom to the capital account in an effort to boost capital outflows and alleviate inward capital flows. The pressures for greater yuan flexibility will continue and a near-term switch to a trade-weighted basket should certainly not be ignored. The speculation will continue to put underlying upward pressure on the yen.
The latest IMM data recorded a small increase in short yen positions and there was a total short position of over 26,000, the highest number of short yen positions for 12 months. The positioning bias will make it more difficult for the dollar to make upward progress and there will also be a risk of a sharp yen correction stronger.
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