The Federal Reserve’s dovish signal and concern over the US banking sector are emboldening yen bulls and spurring bets of a double-digit rally in the currency by year-end.
(Bloomberg) — The Federal Reserve’s dovish signal and concern over the US banking sector are emboldening yen bulls and spurring bets of a double-digit rally in the currency by year-end.
The yen nearly erased losses from a dovish Bank of Japan decision last week, on bets a potential pause in US rate hikes next month may help narrow the interest-rate gap between the two nations. UBS Securities sees yen as the main beneficiary of the Federal Reserve’s decision and expects it to rally to 120 per dollar by year-end, which implies a gain of around 11% from current levels.
Simmering concern over the US banking sector is seen as another fillip for the haven currency, according to Credit Agricole CIB, which forecasts the yen to rally to 122 per dollar by year-end. “Japan’s banks are viewed as an alternative safe haven to US banks as their exposure to higher global rates are shielded by the BOJ’s yield-curve-control,” said David Forrester, Singapore-based strategist at the firm.
The reversal in sentiment for the yen comes after the BOJ’s adherence to its ultra-loose monetary policy last Friday prompted calls for the currency to weaken to 140 per dollar in the coming weeks. Any tweaks in the BOJ’s yield curve control, which is widely expected to happen this year, could provide a yet another tailwind for the yen.
Japan’s currency rose as much as 0.4% to 134.14 per dollar on Thursday before paring the gains to 0.1%. The yen is set to rise for a third straight day, its longest winning streak in a month.
The next key catalyst for the Japanese currency would be US non-farm payrolls data on Friday where traders are looking to sell the dollar should the data underwhelm, said Vassili Serebriakov, an FX and macro strategist at UBS in New York. Any weakness in US jobs data would reinforce the view that the Fed’s tightening cycle is over, he said.
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