Asian turmoil, terror and the yen

Amid recent deleveraging on global assets markets, the yen has benefited from the rush by central banks to cut interest rates, as well as from the steady unravelling of the yen carry trade among investors, as the FT’s currency correspondent Peter Garnham noted on Wednesday. At the end of Asia’s trading day on Thursday, it was hovering around Y95.15 to the dollar.

Currency strategist Ashraf Laidi of CMC Markets attributes some of the yen’s Thursday gains to the impact of Wednesday’s terrorist attacks in Mumbai – which could have been expected to have an instant impact on the usual safe haven currencies – the Japanese yen and Swiss franc – and on gold.

While at the outset of the Mumbai attacks on Wednesday, the yen and the Swiss franc showed “insignificant gains”, says Laidi. But the yen began to creep higher against all currencies during the Thursday Asian session as the crisis unfolded into hostage standoffs in several areas in Mumbai and the death toll surpassed the 100 mark.

The yen’s response became more noticeable in the latter hours of Tokyo trading when the low yielding yen advanced despite a rally in higher yielding currencies such as the sterling, Aussie and Canadian dollar against the dollar – a situation that is not typical of the recent market turmoil.

No response from gold, which remains static at $810-$812 per ounce as the dollar firms against the high yielding EUR, GBP, AUD and NZD. Being a lower yielding currency, the greenback is drawing safe haven bids from the geopolitical developments as well as possible profit-taking in European equities in the midst of ongoing hostage standoffs in India. But some traders are picking up rumblings that the attacks in Thailand and India may transpire into a possible event risk in the US.

As of 2.40am EST (7.40am GMT), [Thursday], strength in the Japanese yen was accompanied by a surge in the other low yielding and safe haven currency – the Swiss franc – against the pound, Aussie, kiwi, loonie and greenback. USDJPY, EURJPY, GBPJPY, AUDJPY, NZDJPY and CADJPY are all trading at their session lows at 95.10, 122.40, 145.80, 61.70, 52.20, 77.30 respectively. These market moves will likely be magnified by thin trading volumes, as the European session winds down into a closed US market.

Many currency strategists expect the yen to keep strengthening, as the FT’s Garnham noted, supported not only by its haven status and Japan’s position as a creditor nation, but also by the closing of yield differentials against other currencies. That, according to Maurice Pomery of IDEAGlobal, could prompt a massive rethink from investment managers and make the yen increasingly attractive to central banks as a reserve currency.