FOREX-Yen under pressure from carry trades, hits 5-yr low vs euro

Hideyuki Sano
Friday, 29 Nov 2013 | 12:06 AM ET

* Yen hits 6-month low vs dollar, 5-year low vs euro

* Yen-carry trades seen gaining momentum

* Euro at 1-month high vs dollar before inflation data

* Sterling outperforms after BoE surprise

TOKYO, Nov 29 (Reuters) - The yen slid to a six-month low against the dollar and a five-year trough against the euro on Friday as rising risk sentiment fanned speculation that more investors might borrow and sell the low-yielding yen to buy riskier assets.

This trading strategy - called the yen-carry trade - comes as investors expect the Bank of Japan will keep or even enhance its ultra-easy policy, to help meet Prime Minister Shinzo Abe's goal of sustaining growth and conquering 15 years of deflation.

"I think yen selling will continue until the U.S. payroll data next week to say the least," said a trader at a European bank, referring to the data due on Friday next week. "And if there's no surprise there, then it could have another leg to go."

The dollar rose as high as 102.61 yen, its highest level since late May, and last stood at 102.52 yen, up 0.2 percent from late European trade on Thursday. U.S. markets were closed on Thursday for Thanksgiving.

The euro shot up to 103.695 yen, surging past its 2009 peak of 139.26 yen and gaining more than 4.5 percent on the week.

Part of the latest selling of the yen, traders said, is driven by short-term players speculatively trying to trigger stop-loss yen selling at 140 yen in euro/yen.

While that points to the chance of a rebound in the yen after such loss-cutting is completed, many traders think the yen's weakness could persist after Japanese economic data bolstered the case for yen selling.

Japan's core consumer inflation accelerated to a five-year high of 0.9 percent in October, data released on Friday showed, adding to evidence that it is beating deflation.

Still, many analysts think Japan still has a long way to reach its inflation target of 2 percent and the BOJ may need to take more steps some time next year to achieve that goal.

By contrast, the U.S. Federal Reserve is looking to reduce its stimulus, although it has not done so yet even six months after Chairman Ben Bernanke signalled that possibility in May.

The lack of Fed tapering so far has helped boost risk assets worldwide, which in turn has prompted speculation of more yen-carry trades.


Inflation data is also in focus in the euro zone later in the day, after surprisingly subdued euro zone inflation data last month sparked talk that the European Central Bank may need to act to prevent the euro zone from slipping into Japan-style deflation.

The euro got a lift on Thursday after German and Spanish inflation turned out higher than expected, which raised speculation that the euro zone November inflation data due at 1000 GMT could beat the market consensus of 0.8 percent and last month's 0.7 percent.

The euro hit a one-month high of $1.3622, though it was still below levels near $1.37 just before the October inflation surprised markets.

Sterling was again a notable outperformer, hitting a fresh 11-month high on the dollar after the Bank of England surprised by scaling back stimulus for the housing sector on Thursday.

Traders took the move as further confirmation of the BoE's confidence in the economic outlook and of their expectations that the BoE is moving closer to raising interest rates from the current record low of 0.5 percent.

The pound hit an 11-month high of $1.6375 and last stood at $1.6368, up slightly from late European levels, and just shy of this year's peak of $1.6380.

Sterling also held the upper hand against the euro, which stood at 83.36 pence, near its 10-month low of 83.00 hit earlier this month.