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Russia buys Yen for forex reserves
Due primarily to soaring commodity prices and a strong economy, Russia has amassed the third largest stock of foreign exchange reserves in the world, now totaling $268 Billion. As a result, when Russia announced that it would begin to hold some of its reserves in Yen, forex traders stopped to listen. Previously, Russia’s reserves were denominated in USD and Euro assets. As the Yen is arguably the most undervalued currency in the world, it makes sense from both a financial and risk management standpoint. The Financial Times reports:
While the news was positive for the yen at the margin, it would be wise for investors not to overreact, given the global context in which central banks have been consistently reducing the share of yen in their foreign exchange holdings.
Russian reserve switch boosts yen
By Peter Garnham
Published: October 16 2006 11:23 | Last updated: October 16 2006 17:29 yen
The yen received a boost on Monday after Russia’s central bank said it had started to buy the Japanese currency for its reserves.
“We are thinking about diversification and want to broaden the number of currencies in which we are allowed to invest assets,” Alexei Ulyukayev, first deputy chairman of the Russian central bank, told a conference in Moscow. “Recently we have included the yen.”
Russia’s $268bn gold and foreign exchange reserves, the world’s third largest, had previously been invested 45 per cent in dollar-denominated assets, 45 per cent in euros and 10 per cent in sterling.
However, Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ, said while the news was positive for the yen at the margin, it would be wise for investors not to overreact, given the global context in which central banks have been consistently reducing the share of yen in their foreign exchange holdings.
“Without other central banks following suit, it could have a limited impact,” he said, adding that the purchase could simply be a speculative move from Russia, reflecting the central bank’s view that the yen could appreciate if the Bank of Japan, as expected, moves to tighten monetary policy next year.
Furthermore, Mr Halpenny said it could be safe to assume that the Russian central bank had finished its yen buying for now. “Nobody announces their intentions to the market before they go out and do it,” he said.
By mid-afternoon in New York, the yen was 0.3 per cent higher against the dollar at Y119.25, rallying from the ten-month low of Y119.88 it hit on Friday, and was up 0.3 per cent to a one-week high against the euro of Y149.26.
The dollar held on to the gains it made against the euro on Friday, standing unmoved at $1.2510.
Most analysts put the recent rise in the dollar against the euro down to interest rate expectations, with the dollar a beneficiary of hawkish rhetoric from the Federal Reserve, which has served to quash expectations for a US rate cut in the first quarter of 2007.
However, Tom Levinson, economist at ING Financial Markets, said he believed the market could be wrong in pricing in no action from the Federal Reserve, saying a slowdown in US inflation, coupled with a weakening US housing market, could see the central bank cut rates by the turn of this year. “When the Fed gets going, its going to be aggressive,” he said. “We could see 100 basis points lopped off US rates.”
In contrast, Mr Levinson said that while eurozone rates were universally expected to rise by 25 basis points to 3.5 per cent in December, it was likely that the eurozone economy would enter 2007 with enough momentum to justify a final rate rise to 3.75 per cent. “If we are right that rate differentials between the US and eurozone could be as low as 50 basis points by mid-2007, then this could push the euro/dollar well above the $1.30 level,” he said.
Elsewhere, sterling made progress after a report showing robust growth in the UK housing market supported the widely-held conviction that the Bank of England would raise UK interest rates after its November meeting.
The pound rose 0.2 per cent against the euro to £0.6726 and 0.2 per cent against the dollar to $1.8602 as the Rightmove housing survey showed a 2 per-cent increase in house prices in October, pushing its annual inflation figure to 11.5 per cent.
Tom Vosa, head of market economics at NAB, said the figures pointed towards a November rate rise, saying they represented just the sort of asset-price inflation that the Bank of England was worried about.
The Australian dollar continued last week’s strong run sparked by the increasing belief that the Reserve Bank of Australia will raise interest rates next month, climbing 0.2 per cent to $0.7527 against the dollar.
Adrian Schmidt, senior forex strategist at Royal Bank of Scotland, said this could be the start of a larger move for the Australian currency, reflecting improved economic fundamentals.“While it still makes sense to trade on the basis of monetary policy in the short run, the improvement in the trade balance in the last year or two makes the Australian dollar a much more solid prospect as well,” he said.
Copyright The Financial Times Limited 2006
http://www.ft.com/cms/s/ec0a51a8-5cf8-11db-9d15-0000779e2340.html
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