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April 18, 2013 3:41 pm
The yen’s slide against the dollar finally came to a halt as market participants appeared unwilling to push the US currency through the Y100 level, in spite of the Bank of Japan’s aggressive monetary policy easing. Will the yen resume its downward path – or is it set to stage a rally?
Lutz Karpowitz, currency analyst at Commerzbank, says that after the failure of the dollar to break above Y100 it was no surprise to see the currency pair consolidate.
“The market has been keen to take up any news which is useful to justify selling dollar/yen,” he says. “Concerns that the US government might turn increasingly critical about the yen’s weakness came just at the right time for sellers.
“However, the current phase will not be more than a consolidation, as the argument made by the US would be rather weak. If the Federal Reserve is buying government bonds, it would be hard to criticise other central banks for following suit.
“That is why we expect dollar/yen to retest Y100 again in the very near future. Non-commercial traders at the International Monetary Market hold significant long positions in dollar/yen, although the positioning is not at extreme levels. The recent consolidation in dollar/yen will have moderated positioning even more.”
Jane Foley, senior currency strategist at Rabobank, acknowledges that the Bank of Japan’s extraordinary pledge to double its government bond holdings in two years does suggest that the yen should continue to weaken.
“However, it is worth taking into account the headwinds that could slow the pace of yen depreciation over the coming weeks,” she says. “The yen remains a ‘safe haven’ currency. This is linked with Japan’s current account surplus.
“Also potentially supportive of the yen is the risk that the US economy could be facing a spring slump in growth. This begs the question as to whether there is too much optimism priced into the dollar.
“If a weaker dollar and haven demand are not enough to slow the pace of upside in dollar/yen, perhaps the risk of a revival of the ‘currency wars’ theme will be sufficient. It is now difficult for the Japanese authorities to argue that the yen is significantly overvalued.”
David Bloom, global head of FX Research at HSBC, says there are no one-way bets on the yen. “The market has been quick to assume a neat relationship between quantitative easing and the currency,” he says. “History suggests this is an over-simplification.
“For example, the dollar is basically back to square one in spite of massive QE. The euro ultimately benefited from longer-term refinancing operation balance sheet expansion, while for sterling the market has viewed QE as an appropriate offset to fiscal tightening.
“Furthermore, the planned expansion in Japan’s monetary base is not large relative to that already seen elsewhere. Other central banks have been even more aggressive than the BoJ, without fostering currency upheaval.
“Even on the most generous interpretation of the link between money growth and FX it is difficult to justify further yen weakness from here. The impact of Japanese policy on other countries, especially in Asia, is also likely to be a constraint.”
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