Wednesday February 22, 2006 - 11:05:05 GMT
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INVESTICA Ltd - www.investica.co.uk
Volatility set to increase
The Japanese currency found support at just stronger than 119.0 against the US currency and strengthened back to 118.50 in local trading on Wednesday with a lack of fresh incentives, although trading turned choppy in Europe on Wednesday. Volatility levels are liable to rise in the short term.
Optimism over the Japanese economy should remain intact inn the short term with the government upgrading its assessment of the economy for the first time in six months. There is likely to be a gradual erosion of opposition to a Bank of Japan monetary tightening.
The evidence at this stage still suggests that there is a flow of funds out of Japan into high-yield currencies even though these funds are being directed to alternative markets compared with recent flows into Australia and New Zealand with the New Zealand currency falling sharply. There will, however, still be the risk of a reduction in flows, especially once the Bank of Japan moves to tighten monetary policy. There remains the possibility of a squeeze on short yen positions which could push the Japanese currency sharply stronger.
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