Friday during early deals, the Japanese yen tumbled to new multi-month lows against the euro, the kiwi and the aussie as a gain in equities boosted investors' risk appetite, dampening demand for the yen.
In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two. The risk is currency fluctuations erase profits between the two rates.
Japan's benchmark stock index jumped more than 5 percent today on speculation the government will introduce additional stimulus measures to lift the slumping economy. Additionally, bleak economic reports from Japan aggravated the weakness of the yen.
The stock markets across the Asia-Pacific region were trading higher today after the US markets closed in the green for the third consecutive day on better-than-expected retail sales data for February. A surge in equities exerted downward pressure on the yen as investors see yen as a safe-haven in times of economic uncertainty. Usually, there is an inverse relationship between yen and stocks. When there is a stock market surge yen falls and vice-versa.
Japanese Prime Minister, Taro Aso's fresh stimulus package to help lift the world's second-largest economy out of one its worst slumps since World War II, also created optimism among investors which send the benchmark Nikkei 225 index by 371.03 points, or 5.2 percent, to close at 7,569.28.
The Mainichi newspaper reported that Japanese new stimulus package may worth 20 trillion yen. The new package is expected to support public work and address rising unemployment. The lower house of parliament had passed a record 88.5 trillion yen fiscal budget on February 27.
This report came a day after a government report showed that the Japanese economy shrank less than analysts expected. Japan's gross domestic product shrank an annualized 12.1 percent in the fourth quarter of 2008, less than the preliminary estimate of 12.7 percent drop reported last month and forecasts that called for a 13.4 percent decline.
A final report from the Ministry of Economy, Trade and Industry also added to yen's downtrend. The report revealed that Japan's industrial production declined 10.2% in January from the previous month, revised down from a 10% fall estimated initially. Year-on-year, decline in production was 31%.
On the other hand, a survey from the Economic and Social Research Institute showed that Japanese household consumer confidence improved to 26.7 in February from 26.4 recorded in the prior month. The indicator stood above the expected reading of 26.5.
Against the European currency, the Japanese yen touched it slowest point since January 7 during today's early trading. The yen touched 127.66 against the euro by about 4:50 am ET. The next downside target level for the yen is seen at 131.07. At yesterday's New York session close, the yen was quoted at 126.21 against the euro.
The yen was the best performing major currency last year, climbing 21 percent against the dollar and 30% against the euro. In a carry trade, investors borrow money from Japan where the interest rate is low to buy high yielding assets in other countries. Such positions lose their appeal in the second half of 2008 against the backdrop of the global credit crisis. As a result, investors liquidated their positions, and the yen soared.
In economic news from Europe, the Eurostat announced that Eurozone retail sales rose 0.1% month-on-month in January, after falling a revised 0.3% in December. Economists' were looking for an increase of 0.2%.
On an annual basis, retail sales dropped 2.2% year-over-year in January, compared with a revised 2.4% fall in the previous month. Economists' had expected a decline of 2.3%.
The yen plunged to a 2-day low of 98.67 against the US dollar in early deals on Friday. On the downside, the Japanese currency may likely target the 99.6 level against the buck. The dollar-yen pair closed yesterday's New York session at 97.74.
The U.S. trade balance for January and the University of Michigan's consumer confidence report for March have been scheduled for release in the New York session today.
The Japanese yen weakened against its Swiss counterpart also during trading on Friday. At about 4:50 ET, the yen touched 83.20 versus the franc, compared to 82.52 hit late Thursday in New York. The next downside target for the yen is seen around the 85.2 level.
The Swiss Franc remained under heavy selling pressure as Swiss central bank lowered its key interest rate near to zero and said that it began buying foreign currencies in its first solo intervention in foreign-exchange markets since 1992. The Swiss National Bank lowered the target range for the three-month Libor by 25 basis points, narrowing it to 0%-0.75% from the previous 0%-1%, with immediate effect.
Against the UK currency, the Japanese yen fell to 138.42, compared to Thursday's closing value of 136.27. This set a 4-day low for the yen. If the yen drops further, 141.5 is seen as the next likely target level.
The yen also weakened against commodity related currencies during early trading. The yen slumped 14 percent against the Australian dollar and the New Zealand dollar since February 02 and hit new multi-month lows of 65.01 and 51.94, respectively by about 5:00 am ET today. The yen was worth 64.00 against the Aussie and 50.90 against the kiwi at yesterday's close.
Against the Canadian currency, the yen touched an 8-day low during today's early trading. The yen fell to 77.40 by about 5:50 am ET, and if it falls further, it may find resistance around the 78.07 level. The loonie-yen pair closed yesterday's deals at 76.52.
The Canadian international merchandise trade for January is due at 8:30 am ET.
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