Published: Thu, 05 Mar 2009 23:38:03 +0100

Risk Aversion Boosts Japanese Yen

(CEP News) - The Japanese yen was the only currency that managed to rally against the U.S. dollar on Thursday as negative sentiment caused U.S. equity markets to fall lower.

USD/JPY's climb to 100.00 JPY was halted at 99.68. The cross has been on a sharp decline since the start of the North American trading session, and remains under significant pressure, trading at around 98.00.

According to currency strategists, news that the Chinese government didn't announce any new stimulus spending caused the rise in risk aversion. Chinese Premier Wen Jiabao spoke on the economy on Thursday and made no mention of further stimulus plans, but pledged to deliver an 8% GDP growth rate in 2009.

As was widely expected, the Bank of England cut its benchmark interest rate by 50 bps to a new record low of 0.50% and pledged to begin purchasing gilts. The BOE pledged to purchase £75 billion at its Asset Purchase Facility by using the central bank's balance sheet rather than the original plan to finance the APF by using short-term debt from the Treasury.

The ECB's interest rate decision helped to boost risk aversion in currency markets. A downward revision to European economic growth caused investors to flee from the euro and into the yen. According to its staff projections, the ECB expects consumer prices to grow at a rate of between 0.1% and 0.7% in 2009, before picking up to a growth rate of between 0.6% and 1.4% in 2010.

The grim news caused EUR/JPY to drop over 2% on the day and give up most of the gains it made earlier in the week. It hit session lows at 122.70.

Data releases out of the U.S., including a drop in jobless claims and a decline in factory orders, did not have much impact on currency markets.

Factory orders in the United States dropped further for the sixth month straight in January, but by much less than economists expected. Orders fell by 1.9%, against expectations for a 3.5% drop and following the downwardly revised 4.9% decline in December, according to the U.S. Census Bureau. Ex-transportation, orders are down 0.9%.

First-time claims for unemployment benefits in the U.S. fell to 639k in the week ending Feb. 28, following an upward revision to the previous week's claims to 670k, according to the U.S. Department of Labor. Claims were forecast to come in at 650k.

Concerns over the Japanese economy have weakened the yen in the last few days and some currency strategists have expressed doubt as to whether it will remain a safe haven currency.

George Androulidakis, director of FX trading at the National Bank of Canada, said he sees the potential for USD/JPY to make further gains and break above 100.00 JPY.

"I think if USD/JPY can hold above 97.50 JPY we will see a break of 100.00," he said.

Euro/USD up 0.06 cents to 1.2546

USD/CAD down 0.03 cents to 1.2909

USD/Yen down 0.14 points to 97.94

GBP/USD up 0.06 cents to 1.4124

AUD/USD down 0.05 cents to 0.6379

Euro/Yen down 0.12 points to 122.88

Euro/GBP up 0.04 pence to 0.8885

GBP/CAD up 0.06 cents to 1.8231

CAD/Yen down 0.12 points to 75.86

Euro/CAD up 0.09 cents to 1.6195

The U.S. Dollar Index is up 0.53 points to 89.11

All data taken at 4:45 p.m. EST.

By Neils Christensen, neilsc@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca