Currencies | Mar 09 2009
By Chris Shaw
Last week FNArena reported on some views in the market suggesting the potential for further weakness in the Japanese yen (See Yen Weakness to Continue, 05/03/09) and this week Standard Chartered has taken the analysis a bit further by examining the currency’s seasonal tendencies.
March is important as it represents the end of the Japanese financial year, a time at which Japanese firms tend to bring money back into the country ahead of the balancing of their books at the end of the month. As these funds represents profits earned overseas they are typically recorded in US dollars and converted into yen, meaning the yen tends to rise leading into the end of the March quarter.
The bank’s analysis shows the post-March period is generally a time of depreciation of the currency, with the trend more noticeable for the British pound, the Canadian, Australian and New Zealand dollar and Korean Won pairs than is the case for the euro and US dollar currency pairs.
Back-testing the impact of seasonal factors Standard Chartered notes following such a strategy delivers only small positive returns on average, so it suggests of greater importance for foreign exchange markets is the fundamental outlook for the yen. Here the bank suggests the sustained yen strength of recent months is over for now, its viewed being formed by two main factors.
The first is Japan’s key economic fundamentals are continuing to deteriorate, to the extent the Japanese economy has slid back into recession in recent months. The second factor is the yen carry trade appears to have run its course, particularly given rate cuts around the world have reduced the yield differential in interest rates between Japan and other nations and so reduced the incentive for Japanese to invest overseas.
One possible caveat to its seasonal analysis in the bank’s view is the Japanese Diet may pass a law where dividends received by domestic companies from their operations abroad are exempted from tax. if this measure is passed the bank sees scope for some yen strength post the end of March as Japanese companies would have more incentive to repatriate profits from overseas.