Yen Edges Up In Choppy Trade As Risk Aversion Rises

The yen climbed against the dollar and euro in extremely choppy trading on Monday, as investors took their cues from slumping Japanese shares and rising risk aversion.

Japan’s Nikkei stock average .N225 was down 1.3 percent in afternoon trade. Many market participants, particularly foreign investors, sell the yen to hedge their equities positions, so the Japanese currency tends to feel upward pressure whenever stocks slip.

A big victory for Japanese Prime Minister Shinzo Abe’s coalition in an election on Sunday was a boost for his reflationary economic policies, which are likely to weigh on the yen in the long term. But the Japanese currency rose as shares dropped, before paring its gains by afternoon.

The dollar was down about 0.2 percent at 118.65 yen JPY=, after dropping as low as 117.78. It remained above a two-week low of 117.44 yen touched last Thursday, and a considerable distance away from a seven-year high of 121.86 yen set one week ago.

Market participants attributed Monday’s whipsaw currency moves to positioning before this week’s Federal Reserve meeting ahead of next week’s Christmas holiday.

“I think the market is enjoying the high volatility in dollar/yen, ahead of the holidays. This week might be everyone’s last chance for trading this year,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

Abe’s Liberal Democratic Party and junior partner Komeito party were assured of more than the seats required to maintain their two-thirds “super-majority” that smoothes parliamentary business, but record low turnout pointed to broad dissatisfaction with Abe’s performance.

Underscoring the uneven recovery brought on by Abe’s stimulus policies, the Bank of Japans’ closely watched tankan survey showed Japanese big manufacturers’ sentiment worsened slightly in the three months to December but corporate spending plans were strong.

The euro shed 0.3 percent to 147.63 yen EURJPY=R, after dropping as low as 146.86 earlier.

Against the greenback, the European unit fell about 0.2 percent to $1.2444 EUR=, which helped mitigate the dollar’s losses against the yen, and bolstered the dollar index .DXY, which was steady on the day at 88.377.

“Things have quieted down since the morning, which was all about equities reacting to oil’s early drop,” said a trader at a foreign bank in Tokyo.

Oil prices whipsawed, adding to volatility in other markets, after the Paris-based International Energy Agency on Friday cut its outlook for demand growth in 2015.

U.S. crude CLc1 was last up about 0.7 percent at $58.22 a barrel after plunging as low as $56.25 earlier to its lowest level since May 2009. It skidded 12 percent last week.

Adding to the risk-averse mood, the Australian dollar dropped to 4-1/2-year lows on falling commodity prices and concerns about global growth, while a hostage incident in Sydney further undermined sentiment.

A black flag with white Arabic writing could be seen in the window of a central Sydney cafe where an armed assailant was holding an unknown number of hostages, raising fears of an attack linked to Islamic militants.

The Aussie fell 0.1 percent to $0.8234 AUD=D4, after earlier dropping toward a 4 1/2-year low around $0.8204.

Investors await the U.S. Federal Reserve’s final meeting of 2014 on Tuesday and Wednesday with a statement and forecasts expected Wednesday at 2:00 p.m. EST, followed by Fed chief Janet Yellen’s press conference half an hour later.

Yellen is seen as erring on the side of being too dovish rather than risking a move that comes in too soon and, compounded with the soft data out of the euro zone, Japan and China, adds to the risk of a slowdown in the U.S. economy. Fed funds rate futures show that the market expects a rate hike at some point in the third quarter of next year.

Source : Reuters