Yen bulls are bracing for a period of weakness in the currency until speculation returns for a Bank of Japan policy tweak at its June or July meetings.
(Bloomberg) — Yen bulls are bracing for a period of weakness in the currency until speculation returns for a Bank of Japan policy tweak at its June or July meetings.
The Japanese currency has fallen to a two-month low against the greenback in the aftermath of the BOJ’s decision to keep its main stimulus measures unchanged and options signal about a 50-50 chance it will touch 140 per dollar by the end of July. Against the euro it has tumbled to the lowest since 2008, with a dovish BOJ contrasting with a European Central Bank expected to keep tightening for the time being.
Strategists at Barclays Plc and Goldman Sachs Group Inc. have moved their expected timing for revisions to yield-curve control — a bullish catalyst for the yen — to July from June. July is when the next BOJ outlook report is due.
“That implies a later start point for an upturn in the yen, meaning that the currency could move in line with overseas market factors with a weaker yen bias for the time being,” a Barclays team including Jayati Bharadwaj and Sheryl Dong wrote in a note.
One of those factors is this week’s Federal Reserve meeting, where hawkish commentary from officials could boost the greenback.
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A gauge of an expected decline in dollar-yen in the options market — so-called risk reversals — eased after the BOJ left yield-curve control unchanged, a sign that traders have pulled back their bets on yen strength.
“There are still some people who expect a tweak in the next few months and as it gets closer to each meeting, there may be some position built for a tweak until July,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp. “Full-scale yen-selling pressure may emerge after July if the BOJ doesn’t deliver any revision at its meeting.”
Still, the BOJ is not the only factor for yen bulls.
Even if the central bank continues to stick with its super-easy policy, a decline in global yields as major advanced economies enter recession could add upward pressure to the Japanese currency through the end of the year, according to Capital Economics. It is sticking with a forecast of 125 yen per dollar by the end of the year, compared with a level of around 136.90 on Monday.
“Yields typically fall by less in Japan than elsewhere during global downturns,” economists John Higgins and Diana Iovanel wrote in a recent note. “In addition, we think that the yen is still substantially undervalued.”
For now, the yen’s weakness is most pronounced against its European peers. The Swiss franc reached its strongest since 1979 against the Japanese currency on Friday, while the pound touched its highest since October on Monday.
“We’ve seen some huge breaks of significant resistance levels – pull up a daily chart of Swiss franc-yen, euro-yen and the British pound-yen and the question will be to chase or not to chase,” said Chris Weston, head of research at Pepperstone Group Ltd. “The real action for the yen comes into June where tactically I see a strong bullish backdrop in the making, but for now, the yen is the weakest link.”
(Updates yen level)
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