The yen soared on Friday after the worst earthquake on record to hit Japan spurred a safety bid, and it could rise further next week if insurers scramble to raise cash by selling their foreign assets. The yen initially fell to a two-week low against the dollar but then shot higher as the full extent of the devastation became clear. The quake triggered a ferocious tsunami, killing at least 1,000 people.
Worries about the impact on a fragile Japanese economy prompted investors to cut exposure to risk, traders said, with Japanese investors who had used cheaply borrowed yen to invest abroad bringing the money back home. The dollar fell 1.2 percent to 81.87 yen, its biggest one-day decline since December 3, while the yen also rallied against the euro, pound and Swiss franc. The euro, meanwhile, rose 0.8 percent to $1.3903 after leaders reached a deal to establish higher retirement ages, more flexible labour markets and debt and deficit limits for euro zone countries.
RETAIL INVESTORS TO DETERMINE YEN DIRECTION The yen's gains were similar to those seen following a severe 1995 earthquake, and Dennis Gartman, editor of The Gartman Letter, told Reuters the yen could soon strengthen to 75 per dollar on repatriations.
"If you look at the earthquake in 1995, that also resulted in yen strength," said Michael Woolfolk, strategist at BNY Mellon. "Japanese investors that have been heavily invested overseas bring it back home in periods of risk aversion." Analysts said Japanese insurance firms could prove to be heavy yen buyers in the days and weeks ahead as they sell foreign assets to pay damage claims.
Investors were watching the bond market for signs of repatriation, but Jens Nordvig, FX strategist at Nomura Securities in New York, suggested the bigger downward impact on dollar/yen, if the current trend lasts, will be a loss of appetite by retail investors for foreign investments.
Retail investor outflows had been picking up over recent months and a reversal might stall dollar gains. Nordvig also distinguished between life insurance firms that are big foreign investors and disaster insurance firms that invest locally. "I'm confident (a large decline in Treasuries) is not going to happen because life insurance companies are the ones that hold a lot of foreign assets and they won't be the ones paying out," he said.
Brian Dolan, chief strategist at Forex.com, said dollar losses should bottom out around 80.50 yen, adding that insurance claims may not be as high as feared since the area that sustained the most damage is largely agricultural. Still, RBC Capital Markets technical strategist George Davis said the dollar "must register a daily close above 83.05 yen in order to produce a bullish breakout and nullify the downside risks that have appeared today." Downside targets include 80.94 and 80.25, he said.
YEN INTERVENTION RISKS, EURO ZONE DEAL A move to 80 yen "is likely to be a line in the sand" for Japanese authorities, already vexed by an anemic economy, and could provoke intervention, said Jessica Hoversen, foreign exchange and fixed income analyst at MF Global in Chicago. Japan's intervention in September - the first in 15 years - slowed the pace of yen gains but failed to reverse them.
The Bank of Japan said it would cut short its two-day meeting next week to just one day and announce its decision that day, while leaders of the ruling and opposition parties pushed for an emergency budget. With rates at nearly zero, the BoJ does not have the scope to cut borrowing costs, as the Reserve Bank of New Zealand did earlier this week in response to last month's earthquake.
Euro zone leaders' deal on a competitiveness pact is expected to be adopted formally at a full 27-nation European Union summit March 24-25. The currency got an earlier boost after Portugal, one of the countries investors fear may need a bailout, announced additional spending cuts to curb its deficit. Some analysts said a "buy-on-dips" strategy makes sense for the euro as the prospect of a series of rate hikes by the European Central Bank should underpin the currency this year.