The Group of Seven’s call on markets to consider Japan’s strengthening economy and be wary of one-way bets in foreign exchange is unlikely to put investors off selling the yen anew.
Finance ministers and central bankers from the G7 industrialised powers said over the weekend that “Japan’s recovery is on track” and expressed confidence that “the implications of these developments will be recognised by market participants”.
European Central Bank President Jean-Claude Trichet went further, saying: “We want the markets to be aware of the risks of one-way bets, in particular on the foreign exchange market.” The yen remained on the defensive this morning garnering little immediate support from the weekend meeting of the Group of Seven which sought to warn investors against selling the yen too aggressively. This suggests a much greater focus on euro/yen from policy-makers, although what steps they can take is unclear. Intervention, however, seems unlikely anytime soon.
The market seemed to agree and nudged the yen lower, though trading was very thin with Japan on holiday. Bets on the yen have been clearly to the downside in recent months with investors using Japan’s low interest rates to borrow yen cheaply to fund purchases of higher yielding currencies.
Japanese gross domestic product data is due on Thursday and a strong number could trigger increased speculation about a rate rise from the Bank of Japan.
There was also the prospect of Japanese repatriation ahead of financial year-end there, and the market was structurally short of yen with IMM data showing 128,500 short positions at the end of last week. Investors are waiting to hear testimony from Federal Reserve Chairman Ben Bernanke on Wednesday and Thursday.
Analysts generally assume Bernanke will reinforce the current steady policy, recognising the economy is doing better than some had feared but cautioning that inflation risks remained.
The dollar ended the week on a strong note Friday in lackluster trading, with investors mostly holding their positions as an international gathering of top monetary officials began in Germany.
The dollar’s gains against the yen suggest investors are no longer betting that finance ministers and central bankers from the Group of Seven leading economies may criticize yen weakness in their official communique.
The big exception to the dollar’s advance was its Canadian counterpart, which ended sharply higher on Friday, reaching its highest levels since mid-January. Unexpectedly robust Canadian jobs data for January propelled the currency higher in early trading. Statistics Canada reported that employment rose 88,900 in January, with analysts expecting a gain of 10,000 jobs.
In the weeks prior to the G7 meeting, some European officials were apparently seeking a way for the G7 to declare the yen is too weak - and thus unfairly beneficial to Japanese exporters - in the hope this would pressure Japan to raise interest rates or take other action to boost its currency.
Against this background, the dollar’s gains were subdued Friday as investors were unwilling to stretch long dollar positions, with expectations of no comment from the G7 largely priced into levels prior to Friday.
There was no U.S. economic data released Friday to spur trading. Three Federal Reserve regional presidents spoke in various parts of the country Friday about the U.S. economy, but the dollar showed little or no reaction.
The Australian dollar has fallen against all corners, in sharp contrast to the rally for its commodity-currency cousin, the Canadian dollar. Concern that the Reserve Bank of Australia will release lower inflation forecasts caused the sell-off. Australia’s central bank as expected cut its forecast, this morning for underlying inflation for the year ahead, saying recent price data gave it more confidence that past interest rate increases were working to contain price pressures.
Financial markets took that to mean there was less risk of a tightening this year and the Australian dollar fell while bond futures pared early losses.
In its 55-page quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) said it expected underlying inflation to slow to 2.75 % in 2007, a step down from its previous forecast of about 3 % back in November. Thereafter, it forecast underlying inflation to stay in a 2.5 % to 3.0 % band in 2008.
U.S. crude futures fell on Monday as tensions with Iran eased, but prices held above $59 a barrel as a cold snap in United States was forecast to continue through the week.
The Dollar against this background and now that a rate hike by the ECB in March is quite well priced in, could be expected to strengthen from here.

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