Investors are betting the yen may rise as much as another 10% after the Bank of Japan’s unexpected policy shift fueled speculation it is finally abandoning its ultra-dovish monetary settings.
(Bloomberg) — Investors are betting the yen may rise as much as another 10% after the Bank of Japan’s unexpected policy shift fueled speculation it is finally abandoning its ultra-dovish monetary settings.
The currency may appreciate to 120 per dollar or stronger due to its inexpensive valuations, according to Generali Investments, while Union Investment Privatfonds GmbH predicts a short-run gain to about 125. Societe Generale SA forecasts the BOJ decision will trigger a hedging wave from overseas funds that may propel the currency higher over the next month.
The yen surged as much as 4.8% on Tuesday after the BOJ blindsided the market by raising its cap on 10-year bond yields to 0.5% from 0.25%. The rally came after the currency had already risen from a more than three-decade low in October as the market trimmed bets on Federal Reserve interest-rate hikes.
“The yen remains fundamentally very cheap,” said Thomas Hempell, head of macro and market research at Generali Investments. Dollar-yen is “is likely to settle closer to 120 or even lower if we are right in assuming that the Fed will start a sequence of rate cuts in late 2023 and 2024,” he said.
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Japan’s currency was trading at 131.93 per dollar at 10.37 a.m. New York time, around where it closed on Tuesday.
Schroders Plc is buying the yen and shorting Japanese government bonds on expectations it will only be a matter of time before the BOJ joins most of its global counterparts in raising rates. PineBridge Investments and Fidelity International are also bullish on the currency.
“The yen will likely become one of the strongest currencies next year,” said Amir Anvarzadeh, a senior strategist at Asymmetric Advisors Pte in Singapore, who has tracked Japanese markets for three decades. The yen is likely to advance to 120 and beyond by summer, he said.
The yen will strengthen, but to drive its ascend further from about 120 to 100 is going to be a challenge, according to Erik Nelson, a currency strategist at Wells Fargo.
“If a substantial amount of money is going to come back from abroad to Japan, that can drive that move from 125 or so down to a 100,” Nelson told Bloomberg TV. “But crucially this relies on inflation in Japan continuing, growth remaining quite strong and BOJ at least providing a little bit more lift in those nominal yields.”
Others say the yen will appreciate, but not quite that far.
“In the short run, we see fair value for dollar-yen at around 125, after incorporating Tuesday’s yield-curve control shift,” said Christian Kopf, head of fixed income at Union Investment Privatfonds in Frankfurt. “Without further changes in rate differentials, we don’t think that the yen will rally beyond that level.”
The yen rallied Tuesday even as Japanese bond yields remain far below those in the US.
Further gains in the currency be tempered if the BOJ fails to raise interest rates, as this would mean the yield spread will remain relatively wide. The market may also be getting ahead of itself in pricing in Fed rate cuts next year given the US central bank’s dot plot.
Some in the market are rushing to revise their yen forecasts to capture shifting bets that the BOJ will become even more hawkish next year.
“Given the quickly evolving situation, we see upside risks,” Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in in a research note. The yen is likely to advance to as strong as 126.35 in the near term, he said.
–With assistance from Alice Gledhill and Anya Andrianova.
(Updates prices, adds comments starting in eighth paragraph)
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