Monday March 7, 2005 - 11:02:50 GMT
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INVESTICA Ltd - www.investica.co.uk
Yen flows finely balanced
The dollar weakened after the US payroll data on Friday and dipped to a low of 104.5 against the yen before rallying slightly. The US currency was slightly stronger in early Europe on Monday at 104.90. Japanese and Chinese officials have denied that they will diversify away from the dollar reserves which will ease immediate fears over central bank dollar selling and sharp dollar losses, but the medium-term fears over a reduction in dollar assets will persist.
The Nikkei index remained strong on Monday with the index rising to an 11-month high. The investment inflows will offer significant yen support, although this will be offset by the attraction of higher US interest rates an potential for outflows from Japanese bond markets. Low risk aversion in global markets will increase the potential for capital outflows from Japan in the short term, although there will be a growing risk of a sharp correction as long positions in high-yield currencies are becoming over-extended.
Chinese comments on the yuan will remain an important background focus. The comments from officials continue to suggest that there will be no dramatic move to revalue the yuan or let it float. There is, however, the possibility of a move to a slightly wider trading band and this would support capital inflows to regional currencies. The net risks remain biased towards yen appreciation on regional factors, although the risks of sharp appreciation have fallen slightly, especially as there is still resistance to sharp Asian currency gains.
The latest IMM data recorded a sharp drop in short yen positions of close to 19,000 contracts in the latest week, cutting the short positions to around 9,000. This will lessen the risk of a sharp yen gains on a covering of short positions.
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