Yen in favour as weak China, Japan data sap risk appetite

TOKYO/SYDNEY: The yen gained on Monday as weak China data fuelled worries about an economic slowdown, while downbeat Japanese figures underscored the drawbacks of a weaker currency.

Investors gave China-proxy currencies such as the Australian dollar a wide berth as their risk appetite faded.

Figures out over the weekend showed a surprisingly sharp drop in exports tipped China's trade balance into a deficit, while inflation cooled to its slowest pace in 13 months.

Meanwhile, Japan posted a record current account deficit in January on Monday, and its fourth quarter growth was revised down.

Still, the Bank of Japan is expected to keep policy uncharged at a two-day meeting that began on Monday, as consumer prices remain on track to meet the central bank's 2 percent inflation target.

"I think many more Japanese people may understand the demerits rather than the merits of the BOJ's policy, such as rising import prices," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.

Some may see Monday's weaker data as a "good excuse for more easing, but more easing won't necessarily boost growth, so the BOJ might shift its focus to growth from inflation," he said, adding, "Boosting bank lending wouldn't weaken the yen."

CHINA DATA KNOCKS AUSSIE

Analysts cautioned against reading too much into the China trade figures given possible distortions caused by the Lunar New Year holiday, but investors were taking no chances.

"Given the softness of inflation data it does appear that the Chinese economy has slowed in recent months," said Craig James, chief economist at CommSec in Sydney.

"The full extent of the slowdown won't be known for a few months. But it appears a mid-cycle pause is occurring as authorities attempt to deal with the effects of the shadow banking system and the pollution problem," he said.

The Australian dollar, usually used as a liquid proxy for China plays, was hit hard. It dropped about 0.4 percent on the day to $0.9036 and about 0.6 percent to 93.06 yen .

The U.S. dollar and euro also fell against the Japanese currency. The greenback slipped about 0.2 percent to 103.06 yen and the single currency also lost about 0.2 percent to 143.09 yen.

U.S. employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, but that was not enough to keep the unemployment rate from edging up to 6.7 percent from a five-year low of 6.6 percent.

"Fundamentally speaking, data out of the U.S. has a bigger underlying market impact, but the psychological effect from Chinese economic indicators cannot be overlooked," said Koji Fukaya, president at FPG Securities in Tokyo.

"The rise in yields after the upbeat U.S. data supports the dollar, but the latest indicators out of China dampen risk appetite and may foil the currency's advances against the yen," Fukaya said.

The euro inched up about 0.1 percent against the dollar to $1.3886, having retreated from a 2-1/2-year peak of $1.3915 after the U.S. jobs data on Friday.

Still, the European common currency ended with a 0.5 percent gain last week with euro bulls heartened by the European Central Bank's reluctance to take further policy action, despite forecasting low inflation for years to come.

Market participants said the euro was resilient in light of the unfolding crisis in Ukraine.

Ukrainian Prime Minister Arseny Yatseniuk will hold talks with President Barack Obama in Washington on Wednesday on how to find a peaceful resolution to its territorial predicament with Russia, the White House said.

Source – Reuters