By Christina Fincher
LONDON - The yen extended a week-long rally against the dollar on Wednesday, flirting with fresh 1-1/2 month highs, on signs of growing foreign interest in Japanese stocks. Tokyo's main stock index has leapt more than 10 percent in the past week, leaving fund managers wondering whether they can afford to maintain underweight positions at a time when the government is keen to boost domestic asset prices ahead of the March 31 year-end.
Merrill Lynch on Wednesday upped its recommended exposure to Japan, following in the footsteps of Credit Suisse First Boston which on Monday raised its short-term weighting on Japanese equities to "benchmark" from "underweight."
"There's reasonable support for Japanese equities and that's holding the yen up," said Russell Jones, head of global foreign exchange research at Lehman Brothers. "There's also repatriation and a sense that the Japanese want to boost domestic asset prices until the end of the fiscal year."
The yen pushed to highs of 131.72 to the dollar in the European morning, up more than a quarter percent from the New York close and within sight of 1-1/2 month highs scaled on Tuesday. The Japanese currency also forged higher against the euro, coming within half a percent of 2-1/2 month highs around 114 scaled earlier in the week.
The euro traded in a tight range against the dollar, around $0.8710 following news of a sharper than expected fall in German industrial orders in January but a smaller than expected rise in German jobless last month. Dealers said market attention was now focused on the release of the Federal Reserve Beige Book summary of economic conditions at 2 p.m. EST and U.S. productivity and jobs data later this week.
YEN SHOWS RESILIENCE
Dealers said that on paper at least there were a number of factors that should be weighing on the yen, particularly as Japan's economy has yet to show any sign of coming out of recession. Moody's Investors Service again warned its review of Japan's credit rating might result in an aggressive two-notch downgrade and that, if the situation continued to deteriorate, the pace of downgrades might even accelerate. Economic data released earlier showed an unexpectedly severe fall in capital spending by Japan's corporations in the October-December period. Gross domestic product data for the fourth quarter are due on Friday and are expected a show a third straight quarter of contraction.
"Longer-term we are still bearish on the yen, as Japan's fundamental picture shows no sign of improvement," said David Mann, global market economist at Standard Chartered. "Both the stock market and the yen are being supported by short-term factors which are unlikely to last beyond the fiscal year-end."
OPTIONS PLAY
The yen's stoicism in the face of gloomy data led some traders to suspect the deadening hand of option positions. One rumor was that an Asian bank had taken a double no touch option with strikes at 131.50 and 135.75. This is essentially a wager that the Japanese currency will touch neither of those levels until the position matures late this month. Others reported talk of a big binary option with strikes at 131.75 and 134.50 while some heard an option trigger at 132.70 was due to expire Friday worth anything from $1.0-$2.0 billion.
"You can't take a call without hearing some story about a big option being protected or some exotic bet on dollar/yen staying in a range," said a U.S. bank dealer in Tokyo. "These positions have to be managed by meddling in the spot market and you never know if this buy order is for that option or this seller is trying to break that one.