The yen risks falling to levels last seen in 1986, with bearish traders unfazed by the specter of government intervention to prop up Japan’s struggling currency.
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(Bloomberg) — The yen risks sliding to levels last seen in 1986, as bearish traders remain unfazed by the specter of government intervention to prop up Japan’s struggling currency.
According to Sumitomo Mitsui DS Asset Management Co. and Mizuho Bank Ltd.
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Investors see few catalysts at present, including possible yen purchases by the Bank of Japan, that would be powerful enough to reverse the momentum that has sent the yen down nearly 12% this year. Market movements since early May underline this point, with the yen almost back to its original level after a record 9.8 trillion yen ($61.4 billion) incursion into the market.
“There is potential for dollar/yen to reach 170 relatively quickly,” said Nick Twidale of ATFX Global Markets, who has traded the Japanese currency for a quarter of a century. “Short-term interventions simply don’t work. »
At the heart of bearish bets on the yen is the yawning interest rate gap between Japan and the United States. The Federal Reserve has yet to cut interest rates, with its benchmark’s upper limit at 5.5% while the BOJ’s is barely above zero.
That has helped make the yen, which is the world’s third-most traded currency, a prime target to sell against everything from the higher-yielding dollar to the euro to its emerging-market counterparts.
Although Masato Kanda, Japan’s top foreign exchange official, warned on Monday that authorities were ready to intervene around the clock if necessary, his comments had little impact.
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The yen changed little Tuesday morning in Tokyo, trading around 159.60, a stone’s throw from the 160.17 set on April 29, when Tokyo would have carried out the first of two recent interventions. The second seems to have taken place on May 1st.
What Bloomberg strategists say…
« With the Federal Reserve in no rush to cut interest rates, traders can see that the focus on a recovery in the yen rests with Japanese authorities and so far their words aren’t doing much to convince traders to change direction. »
Mark Cranfield, Live Markets Strategist
To read more, click here.
Japan’s currency could strengthen beyond 150 per dollar if authorities intervene, but « in the long term, the yen will continue to weaken to 170, » said Shinji Kunibe, senior portfolio manager at Sumitomo Mitsui DS Asset Management.
« It’s really tempting to say ‘you can’t do 170,' » said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Is this desirable? No. Is this ruled out as a possibility? Unfortunately no. »
Asset managers are also pessimistic. They invested in bets against the yen in the week ended June 18, marking the most bearish positioning since 2006, according to Commodity Futures Trading Commission figures released Monday. Hedge funds also strengthened bearish bets on the yen, remaining near the recent record high, data showed.
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Of course, not all observers are negative about the yen. Taro Kimura, senior Japan economist at Bloomberg Economics, wrote that « the yen is more likely to strengthen than weaken in the coming months as yield differentials become more favorable. » His view hinges on a double rate hike by the BoJ and a double rate cut by the Fed by the end of the year.
For now, however, investors are bracing for more immediate market volatility if Tokyo returns to trading.
There is a risk of intercession if the currency moves « more than a yen per day for several days, » said Hiroshi Namioka, chief strategist at T&D Asset Management Co.
The market also appears to be « less afraid » of intervention given the steady upward pressure on the dollar-yen since the authorities’ last intervention, according to Alvin Tan, head of Asia foreign exchange strategy at the Royal Bank of Canada in Singapore.
“I still doubt there is a firm red line for Tokyo on the dollar-yen, and new highs above 160 lie ahead,” wrote Tan, who was the lead dollar-yen forecaster in the first quarter , according to data compiled by Bloomberg.
—With help from Daisuke Sakai and Anya Andrianova.
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