The yen broke its losing streak on Monday, buoyed by a heady cocktail of strong Japanese data, stretched positioning and further gains by the Chinese renminbi.
The yen has slumped in recent weeks, repeatedly hitting all-time lows against the euro and falling to a 21-year-low in real effective terms last week.
However, the yen rose 0.9 per cent to Y115.97 against the US dollar, 0.7 per cent to Y149.23 to the euro and 0.9 per cent to Y220.99 against sterling to claw back a fraction of its recent losses.
The obvious catalyst was data showing that capital spending by Japanese companies rose 16.6 per cent year-on-year in the second quarter, above both the 13.9 per cent growth rate seen in the first quarter and the 14.5 per cent rate expected.
“Ongoing healthy investment alleviates concern the economy is slowing,” said Adrian Foster, FX salesman at Dresdner Kleinwort, who believed the data could prompt an upward revision of second-quarter GDP.
Other factors were also at play, however. Data released over the weekend from the US Commodity Futures Trading Association showed that net short-yen positions held by speculative traders had risen to a record $9.5bn, well above the previous high of $8.1bn, with gross shorts up from $11.4bn to $13.1bn.
Greg Anderson, analyst at ABN Amro, argued that a complete unwind of these positions would cause the yen to rally by 2-3 per cent.
Furthermore, the Chinese renminbi rose 0.19 per cent to a fresh post-revaluation high of Rmb7.9385, building on the record post-revaluation gain of 0.29 per cent the currency made last week.
Many in the market believe a stronger renminbi would help push all Asian currencies higher, including the yen, the most liquid proxy on this trade.
“The initial catalyst for the yen’s gains was the release of capital expenditure data. But along with the market’s positioning, it is entirely plausible that the yen’s continued appreciation was partly a function of the renminbi’s further appreciation,” said Neil Mellor, currencies strategist at Bank of New York.
“With this in mind, perhaps the real risks to yen shorts stem from the likelihood that the topic of Asian currencies will be aired in an increasingly urgent fashion at forthcoming [September 15-17] IMF, G7 and World Bank meetings.”
Divyang Shah, strategist at IdeaGlobal, agreed, arguing: “For this week and potentially ahead of the G7 and IMF meetings, longs on yen seem attractive”.
The weakest major currency was the New Zealand dollar, the prime beneficary of yen-funded carry trades, which fell 0.3 per cent to $0.6532 against the US dollar and 1.2 per cent to Y75.78 against the yen.
However the Australian dollar, another gainer from the same trade, was saved from a similar fate by the release of strong data.
Building approvals rose 8.3 per cent month-on-month in July, well above forecasts for a gain of 0.8 per cent, prompting the market to price in a 60 per cent-plus probability that the Reserve Bank will raise rates by a further quarter-point to 6.25 per cent by December.
The Aussie dollar rose 0.6 per cent to $0.7712 against its US counterpart and 0.7 per cent to A$2.469 against sterling, although this was not enough to prevent it slipping 0.3 per cent to Y89.50 against the resurgent yen.
The euro ticked 0.2 per cent higher to $1.2865 against the dollar as the outlook for further eurozone rate hikes was buoyed by underlying eurozone producer price inflation rising to 3.4 per cent in the year to July, a decade-high, from 3 per cent a month earlier.The Turkish lira rose 1.3 per cent to TL1.4445 to the dollar as consumer prices fell 0.4 per cent in August, dragging the annual rate down from 11.7 to 10.3 per cent and suggesting that the central bank may be winning its battle against spiralling inflation.