Kuroda Line Keeps Yen Unbowed as Yuan Shock Ripples Across Asia

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Kuroda Line
Kuroda Line

As China’s devaluation of the yuan drags the currencies of its neighbors to new multi-year lows, the yen has been steadfast amid speculation the Bank of Japan doesn’t want it to weaken much further.

Japan’s currency gained versus the dollar for the first time in three days on Wednesday, after the Chinese central bank’s move a day earlier. It has stalled near a 13-year low set in June. Australia’s dollar dropped to a six-year low and Taiwan’s currency slid to levels unseen since June 2010.

The yen’s drop halted at 125.28 per dollar Wednesday, within the 124.50-to-125.50 range that some traders in Tokyo have dubbed the Kuroda line. The currency had rallied for about a month since weakening to 125.86 on June 5, after Bank of Japan Governor Haruhiko Kuroda said he couldn’t see it depreciating much more when adjusted for inflation and trade.

“We’re getting close to the recent top of the range that had prompted some jawboning from Japanese officials,” said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong. “The market is somewhat wary.”

The yen strengthened 0.8 percent to 124.16 per dollar at 8:10 a.m. New York time from 125.13 Tuesday, when it weakened 0.4 percent.

The People’s Bank of China intervened Wednesday to stem the yuan’s biggest two-day rout since 1994, people familiar with the matter said, a day after cutting the daily reference rate by 1.9 percent.

Flight to Safety

Japan’s currency may be insulated from losses because the country is a net importer of Chinese goods, analysts including Trinh said. Australia exports more to China than it imports.

The yen also benefited from its traditional role as a safe haven after the MSCI Asia Pacific Index of stocks slumped 1.3 percent, extending Tuesday’s 1 percent decline.

“Equity markets globally haven’t liked this,” said Ray Attrill, the global co-head of currency strategy in Sydney at National Australia Bank Ltd. “The yen tends to do best when markets are in a risk-averse mood.”

The yen has been the most resilient major currency against the dollar over the past two months after the pound. Demand for the greenback grew as traders increased bets that the Federal Reserve will raise interest rates next month.

The odds of a rate increase have dropped to 42 percent from 54 percent at the end of last week, based on the assumption that the benchmark will average 0.375 percent following the increase, as the yuan’s revaluation buoyed the dollar, dimming prospects for U.S. exporters.

“At the end of the day, the focus will still remain on the Fed,” said Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo. “If the Fed does hike in September, then there is going to be some upward pressure on dollar-yen. If not, it could be heavy.”

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