Weekly Currency Wrap-up
The yen has been an important market focus for the much of the past week. From levels beyond 119.0 after the strong February US payroll on February 3rd, the yen strengthened back to highs around 117.50 against the dollar on Tuesday as short yen positions were liquidated.

Over the past few weeks there has been a fresh build up of short yen positions, in part to fund speculative positions in commodity and high yield instruments. Speculation over a potential Bank of Japan monetary tightening, coupled with lower commodity prices, helped trigger a sharp market adjustment and there was evidence of a direct linkage between the two as long commodity/short yen positions were liquidated. The move was most marked in gold prices which fell by over US$25 per ounce over a 24-hour period on Tuesday with this drop coinciding with the yen strengthening. The Australian dollar has been strengthened by an inflows of funds from Japan over the past few months and the Australian currency had a slightly weaker tone over the week. The Bank of Japan voted for an unchanged policy at the latest monetary meeting by the same 7-2 margin that has been seen over the past few months.

The comments from Bank of Japan governor Fukui continued to suggest that the central bank would consider a policy tightening in March or April. Fukui effectively hinted that the bank would move if the consumer price index continued to show annual increases and the remarks overall suggested that the central bank has moved closer to a tightening. The speculation over a near-term tightening in Japan was subsequently fuelled by strong machinery orders data which recorded a 6.8% jump for December to give an annual 15.5% increase.

There was also further evidence of a recovery in the banking sector with lending not showing an annual decline for the first time in five years. Pointedly, the chairman of giant Japanese banking group MUFJ also called for interest rates to be increased. In response, Japanese bond yields rose to a five-year high on Friday. In contrast, however, the Finance Ministry continued to preach caution over a policy tightening.

The yen was able to secure fresh gains on Friday with a move to 117.50 against the dollar from 118.85. These gains extended to just 116.9 following the US trade data as short yen positions were closed and position adjustment will remain very important for the markets over the next few weeks. The dollar was also unsettled briefly by reports that Japanese institutions were becoming less willing to invest in US securities due to concerns that the dollar was too strong.

There was little in the way of US data over the first half of the week and markets continued to price in further Federal Reserve interest rate increases, especially after another strong set of jobless claims data. The US trade report was slightly worse than expected with a December deficit of US$65.7bn from US$64.7bn the previous month, pushing the 2005 deficit to a record US$725.8bn.

The dollar made several attempts at pushing through the 1.1950 level against the Euro, but the Euro was able to find some support with the US trade data pushing the dollar back to just weaker than 1.20.

The UK data was mixed with contradictory evidence on the housing sector as the Halifax bank reported a price drop in January while other surveys pointed to a further small increase. There was a recovery in consumer confidence while there was some evidence of higher wage pressures. Given the uncertainty over near-term growth and inflation trends, the Bank of England left interest rates unchanged at 4.50%. Sterling secured some recovery after market doubts over a March rate cut started to increase while Sterling was also able to recover from a record 2005 trade deficit. Sterling recovered from lows of 1.7380 against the dollar to above 1.7550 late on Friday.

Have a great day and a wonderful weekend.