Wednesday FX Brief: Yen Weaker After Political Risk Rises

by: Interactive Brokers

The dollar surged against the Japanese yen in the aftermath of the resignation of increasingly out-of-favor Prime Minister Yukio Hatoyama and his deputy. The likely successor is thought to be Finance Minister Naoto Kan, who is thought to prefer a weaker yen, which would benefit Japan’s exporters. The yen slipped to beyond ¥92.00 per dollar for the first time in two weeks.

Japanese yen –The yen did remain resilient against the euro, which faces ongoing weakness this morning at ¥112.11. However, in the bigger picture today marks an uptick in political risk for the currency until an appointment is made and even beyond if the incumbent indeed condones currency weakness. According to political sources Mr. Kan is most likely to be the next Prime Minister. Just three months before he took office as Finance Minister the yen had surged to a three-year high at ¥84.83 and even as it was cooling off he indicated that exporters would prefer to see the yen range between ¥90 and ¥95 and hence today’s dollar strength against the unit.

Euro – The euro is trading at $1.2200 in early New York trading and remains on the back foot today. In an interview with German newspaper Handelsblatt, ECB member Christian Noyer noted that since the euro was trading around its decade-long average it is “by no means an extraordinary level.” And so Mr. Noyer’s comments appear to show a different and contrasting perspective to the perception of investors who have been fretting about the apparent weakness in the euro. Investors have taken the value of the euro as a key barometer of global risk, while central bankers appear more sanguine. However, another comment from EC President Barroso today called upon members to seize the era of austerity as a time to create “a strong and credible” euro.

British pound – The British pound reached $1.4770 following an official statement from insurance giant Prudential confirming that it was unable to secure better terms for a takeover of AIG’s Asian insurance unit. In March the deal was confirmed at $35.5 billion and the company announced that it would offer a $21 billion rights issue to existing shareholders to finance the deal and it also admitted it had locked into the price through the sale of sterling in the currency market.

In today’s statement the company said it had failed to arrange better terms in light of the market’s decline since the initial agreement was penned and that it had listened to its shareholders. Having sold the pound to lock-in should have isolated the price especially since it appears any hedging took place at around $1.5200. However, what seems to have closed the door is the attitude of shareholders who obviously shrieked loud enough to make management listen. Having cleaned up on a profitable hedge the Prudential said in its statement that the break-up and advisory fees etc. amounted to £450 million.

With the prospect of a removal of the hedge, investors have pounced on the pound ever since they sniffed this out in the last several days. The pound later slipped to $1.4594 as the euro weakened. Against the euro the pound is currently trading at 83.46 pence having earlier risen to 82.80 pence. Data wise, the pound earlier benefitted from an unexpected rise in the services PMI data, which built on the previous month by rising to 58.5 indicative of strengthening expansion throughout May in the key services area.

Aussie dollar – The Aussie dollar appears to be finding support at 82.75 U.S. cents in the current bout of risk aversion. After the Reserve Bank left rates unchanged this week, investors are still undecided about the prospects for the remainder of the year. The pace of economic expansion for the final three months of 2009 was revised higher in data released today, allowing for a higher first quarter pace than analysts were expecting. The first quarter growth rate of 0.5% was half the pace of the prior quarter with annualized data slipping marginally to a still healthy 2.7%.

Canadian dollar – The Canadian dollar is unchanged on the day having spent Tuesday digesting the message from the Bank of Canada when it raised its overnight loan rates. Trading at 95.23 U.S. cents investors are left wondering whether the robust level of domestic activity can remain on track if European woes continue. The accompanying Bank statement yesterday leaned heavily on this premise in determining future changes to its policy stance.