Tuesday February 27, 2007 - 11:32:28 GMT
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INVESTICA Ltd - www.investica.co.uk
Position unwinding supports yen
There is a small possibility of rapid yen gains to at least 115.0 against the dollar if carry trades are unwound in a disorderly manner.
The yen recovered back to highs around 120.35 against the dollar on Monday and also regained some ground against the Euro. The Japanese currency retained a firmer tone in Asian trading on Tuesday with gains to 120.10 while the advance extended to 119.45 in early Europe as a reduction in short yen positions combined with more general dollar weakness.
There has been some narrowing of the US-Japan yield gap with the dollar premium narrowing to a two-month low. This reduction will tend to ease selling pressure on the yen in the short term with a reduction in asset flows overseas.
There is the risk of capital repatriation during March ahead of the fiscal year end which will underpin the yen. Carry trades will remain an important focus and the IMF Chief Rato warned overnight that the carry trades were dangerous. At the ECOFIN meeting, European finance officials repeated the comments from the February G7 meetings which warned over the dangers of one-way trades. Overall, there is likely to be some further unwinding of the more aggressive positioning against the yen with volatility set to remain higher.
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