Yen stays firm while Tokyo rebounds

The inevitable rebound in the Japanese stock market appears to be confined to the region and there are few other signs of lower risk aversion on Wednesday. What appears to be shaping up as a weaker start on Wall Street is accompanied by continued upwards pressure on the Japanese yen as domestic investors reach across the oceans to bring funds back home.

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Japanese yen – The Bank of Japan poured a further ¥5 trillion into domestic money markets to ensure that liquidity remained abundant while aiming to support investor sentiment. The Nikkei 225 index rebounded by 5.7% alleviating one pressure valve and allowing other Asian bourses and local dollar units to breathe easier. However, the relief seems to be minimal with investors picking up bargains following a 17% two-day decline. The yen has strengthened once again in the European session and currently buys ¥80.70 as repatriation flows continue to signal elevated fears. Against the euro the yen is up by around 0.5% at ¥112.45.

Aussie dollar – The relief for Japanese stocks also removed some of the anxiety surrounding the Aussie dollar, which on Tuesday reached a four-month low against both the dollar and yen. The disaster in Japan has significantly dampened enthusiasm for the Australian dollar with the immediate impact on regional economic health the foremost consideration. Since the disaster, money market traders have removed expectations of any further interest rate increase, partly due to contents of minutes released this week by the RBA, but its view is crystalized by turmoil in Japan. The Aussie tracked the rebound in the Nikkei and rose against the dollar to buy 99.23 U.S. cents and also rose to buy ¥80.08. A leading index provided by Westpac using January data dipped by 0.1% following a 0.9% rise the previous month. The index is used to predict activity six months forward, but in today’s market the interpretation of such data is lost.

U.S. Dollar – The FOMC in its statement on Tuesday following the decision to leave interest rates unchanged was a little more upbeat about the prospects for the U.S. economy. The committee noted that despite the significant rise in commodity prices, expectations over inflation remained stable. Meanwhile the risks ahead of inflation falling too low were deemed to be lower than before. Overall the statement appears to support the view that the Fed will live out its second phase of open market bond purchases but won’t feel the need to go any further. The dollar index is higher this morning with gains evident after a rocky start for European units.

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