ASIA MARKETS: Yen Soars, Sending Japanese Exporters Skidding

Japanese exporter shares came under pressure as the yen soared to a nearly seven-month high against its U.S. counterpart Thursday, buoyed by a tide of risk aversion after global stocks sold off.

The dollar slipped as low as 91.92 yen in early Tokyo trading, as investors sought the perceived safety of the lower-yielding Japanese currency. The greenback later pared some of the loss to trade at 92.20 yen, close to its level in late North American trade Wednesday.

The euro was buying 131.46 yen, after falling as low as 131.14 yen earlier Thursday.

"Break of the July low of 91.74 sets up a test of the 90.0 to 90.5 area. Some yen bulls are talking about the December-January lows around 87.10," wrote currency strategists at Brown Brothers Harriman in a research note.

On Wednesday, the Industrial Average fell 29.93 points, or 0.3%, to end at 9280.67, marking its fourth straight day in the red and its longest losing streak since June 24.

The drop came after payroll provider ADP said employment in the U.S. private sector fell by 298,000 in August, suggesting a larger-than-expected fall in the closely watched nonfarm payrolls number, due out Friday.

Exporters suffer

In Tokyo trading Thursday, Japanese exporter shares skidded in line with the stronger currency, which reduces the value of their overseas profits when repatriated into yen.

Tokyo-traded shares of Hitachi Ltd. (HIT) were down 1.5%, and Honda Motor Co. (HMC) fell 2.4%. NEC Corp. slid 2.7% and Pioneer fell 4.1%.

The benchmark Nikkei 225 Stock Average was down 0.4% at the end of morning trading. The broader Topix index of all issues on the Tokyo Stock Exchange's First Section was down 0.6%.

Other regional markets were mixed, with South Korea's Kospi up 0.1%, and New Zealand's NZX-50 0.5% higher. Australia's S&P/ASX 200 was down 0.1%.

However, the Shanghai Composite was up 2.3%, and Hong Kong's Hang Seng Index was 0.7% higher.

U.S. bonds offer yen clues

The negative correlation between the yen spot rate and U.S. dollar 10-year swap rates has recently increased, Tohru Sasaki, chief forex strategist for J.P. Morgan Chase Bank in Tokyo, said in a research report Thursday.

With U.S. dollar 10-year swap rates currently nearing mid-July lows, the yen is more likely to strengthen if U.S. long-term yields fall further, he said.

"We continue to see upside risk for [the] Japanese yen, with high probability of U.S. dollar/Japanese yen breaking below 90 and euro/Japanese yen below 127," Sasaki said, as lower U.S. yields "could lead to a wave of yen-short position unwinding by Japanese retail investors and an acceleration" of the yen's gains.

Yields on the benchmark 10-year Treasury note (UST10Y) fell 6 basis points to 3.306% on Wednesday.

In a vicious cycle, risk aversion is further pressuring bond yields lower.

"Bond yields around the world continue to deflate on this ongoing resumption of risk aversion," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Conn., in emailed comments.

"Many central banks have underlined the likely weakness in recovery, and although some have thrown bones to the exit-strategy hungry crowd, bond prices appear to be more willing to follow the words of central bank wisdom at this stage," Wilkinson said, adding that "a recovery in equities would be needed to alter that thought process."

Later Thursday, investors will be watching the U.S. Treasury's announcement of supply for next week's 3-year, 10-year, and 30-year Treasury auctions. J.P. Morgan predicts issuances to total $39 billion, $20 billion, and $12 billion, respectively, Sasaki said, but a downside surprise could add fuel to the yen's fire.

Bond yields move inversely to prices, so tighter supplies could push up prices and drag down yields.

"The previous supply announcement for 2-year, 5-year, and 7-year auctions turned out below market expectations and led to a U.S. Treasury rally," Sasaki said. "The possibility of a similar development this time around may be worth watching with respect to [the] Japanese yen."