'The World Economy Reeks Again, So Buy Yen'

♠ Posted by Emmanuel in , at 3/23/2012 09:53:00 AM
I have an avowed love-hate relationship with newswire coverage of various financial markets. With regard to currencies, one of the things I am most cautious about is the need to constantly provide explanations of why currency movements occur. I suppose having to provide a laundry list of reasons is a necessary task in the news business. Yet, the ephemeral nature of the task makes it subject to no small amount of improvisation and, dare I say it, conjecture.

Something that's fascinated me as of late are movements in the Japanese yen. Despite the continuing deflationary situation, the aftermath of the terrible tsunami and their budget deficit over 200% of GDP, the yen managed to strengthen to all-time (nominal) highs. Many reasons have been given for the mighty yen--some convincing, others less so.
However, the yen appears to have run out of nitro or whatever is fuelling its ascent in recent weeks as the currency has shown signs of coming back to Earth and the gravity of Japan's unpromising economic situation reasserts itself. Or think again. What we've have in the past few days is the yen strengthening against most other major currencies as "risk off" conditions indicative of the global economy slowing down once more favour it once more as a safe haven bet (of sorts). From Reuters:
The safe-haven yen held on to overnight gains in Asia on Friday, having risen across the board as investors gave risk currencies like the Australian dollar a wide berth on worries about the health of the global economy. Surveys on Thursday showed manufacturing shrank for a fifth month in China, while factory activity in Germany and France -- Europe's two biggest economies -- suffered big falls.

This prompted investors to dump growth-linked currencies and take shelter in the yen, which rose against the dollar, euro, Aussie and kiwi. The dollar fell more than 1 percent on Thursday to a 1-1/2 week low of 82.31 yen, before recovering a bit of ground to last stand at 82.60. "Fears of a Chinese hard landing are on the rise; overdone we think," said Vincent Chaigneau, strategist at Societe Generale. "Concerns over Europe are burgeoning again, rightly so given the weak economy and the toxic focus on enlarging the firewall," he added. 
So we have above the World Economy Reeks explanation for safe haven flows into the yen without necessarily comprehending why the Japanese yen would be a safer choice than, say, the Canadian dollar. At the risk of adding to this already long laundry list of explanations of how Things Going Wrong Elsewhere Affect the Yen, consider too the annual Yen Repatriation Story in the run-up to the end of March when Japan's financial year ends. Some IPE bozo explains the phenomenon thusly:
Longtime FX followers will know that yen movements around this time of the year are attributed to repatriation flows as firms wrap up their fiscal year at the end of March. That is, they need to reconvert their foreign exchange holdings back to yen for the purposes of financial reporting as they close the books. 
However, the MoF indicates that it canvassed Japanese MNCs' requirements for purchasing yen for the said event and found that there would be no large requirement this year. Go figure; FX is an especially wacky game to speculate in.