History Repeating in Yen Decline Reminds UBS of 1995: Currencies
Stock Chart for UBS AG (UBSN)
The currency market is experiencing a bout of deja vu, with the yen’s tumble to a 4 1/2-year low and the dollar’s rebound drawing resemblances to 1995.
Just as 18 years ago, the Bank of Japan is taking unprecedented steps to boost the economy and U.S. growth is showing signs of strengthening, raising speculation the Federal Reserve will temper its stimulus. Back then, the events marked the start of a three-year slide for the yen and a long-term bull market in the greenback that pushed the U.S. Dollar Index (DXY) higher in five of the following six years.
The year “1995 continues to offer striking parallels with current market developments,” said Mansoor Mohi-uddin, the Singapore-based head of foreign-exchange strategy at UBS AG (UBSN), the world’s fourth-largest currency trader as measured by Euromoney Institutional Investor Plc. (ERM) “The divergence between the two central banks will help keep pushing the dollar-yen higher.”
After weakening 15 percent this year, the yen is less than halfway through a drop that will take it to 120 in 2014, according to Mohi-uddin’s forecast. Group of Seven countries’ finance chiefs signaled acceptance of the yen’s slide after meeting late last week in Aylesbury, near London, as the BOJ tries to end years of deflation by flooding the financial system with cash.
At the same time, the greenback is getting a boost as U.S. jobs and housing rebound. The Dollar Index has risen 6.1 percent to a nine-month high of 83.941 today from this year’s intraday low of 78.918 on Feb. 1 as employers added an average of about 196,000 workers in the first four months of 2013.
“The recovery in the U.S. economy in 2013 is likely to provide a tailwind for yen-selling,” Taisuke Tanaka, the chief foreign-exchange strategist and head of fixed-income research at Deutsche Bank AG, the biggest currency trader in a Euromoney poll, said in a seminar in Tokyo yesterday.
The yen touched 102.76 today in New York, the weakest since Oct. 14, 2008. It declined 0.1 percent to 102.51 as of 12:35 p.m. in New York.
The pace of the yen’s drop has forced strategists to rush to catch up, cutting their estimates versus the dollar and the euro by the most among more than 50 currency pairs tracked by Bloomberg.
Analysts have lowered year-end forecasts for the yen by 17.1 percent since December, to 105 per dollar from 87, according to the median of more than 50 estimates compiled by Bloomberg. Mohi-uddin and Tanaka said they see it at 110 by the end of this year.
Against Europe’s 17-nation currency, the forecast has been trimmed 17.4 percent to 132 per euro from 109. Estimates are for the Japanese currency to fall to 110 to the dollar in 2014.
Mohi-uddin predicts the dollar will strengthen about 8 percent against both the euro and the British pound and more than 3 percent versus the Swiss franc. The U.S. currency was at $1.2902 per euro and $1.5215 to the pound. The franc was at 96.65 centimes per dollar.
The yen has tumbled about 9 percent since new BOJ Governor Haruhiko Kuroda said April 4 the central bank would buy at least 7 trillion yen ($68.5 billion) of government bonds a month to achieve a 2 percent annual inflation target within two years. The plan accelerated a decline kick-started by Prime Minister Shinzo Abe in November, when he called for “unlimited” easing to defeat deflation.
The effect of the central bank’s monetary is “so far, so good,” though a level of 110 yen to the dollar would be “too weak,” said Eisuke Sakakibara, a former Japanese vice-finance minister known as “Mr Yen” for his influence on exchange rates in the 1990s.
“It will probably weaken toward 105, but it will probably turn around in the range between 105 and 110, because the Japanese economy at this moment is very strong, and with a strong economy, a currency does not keep falling,” Sakakibara said in an interview.
“The difference in the policy outlook for Japan, where it’s uncertain it can achieve its inflation target by 2015 even after doubling the monetary base, and the Fed, where it’s standing ready to exit quantitative easing, is crystal clear,” said Daisaku Ueno, a senior currency and fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.
Fed policy makers are buying about $85 billion of Treasuries and mortgages securities a month to foster the recovery. The median estimates of economists surveyed by Bloomberg is for gross domestic product to expand by an annualized 2.6 percent by year-end, while Japan’s inflation rate remains under 0.5 percent.
“The current yen-bear cycle seems to have an intensity that we’ve never seen before,” Ueno said.
For UBS’s Mohi-uddin, the yen’s decline echoes the three-year depreciation that started in the mid-1990s, to a eight-year low of 147.66 per dollar in August 1998 from a then post-World War II record of 79.75 in April 1995.
That slide followed the BOJ switching its policy target to an overnight money-market rate for the first time to boost the effects of monetary easing. Investor concern that Japanese banks’ creditworthiness was declining and the impact of the Asian regional crisis also weakened the currency in the 1990s.
Japan and its Asian neighbors aren’t suffering from those problems now. And while Japan sold 4.96 trillion yen of its currency in 1995, according to Ministry of Finance figures, it hasn’t intervened in the foreign-exchange market since November 2011 following the currency’s climb to a record 75.35.
“We’re seeing yen depreciation from a fairly neutral valuation, even without intervention,” said Junya Tanase, the chief currency strategist at JPMorgan Chase & Co. in Tokyo.
The yen has weakened 21 percent in the past six months, making it the biggest loser among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The real effective exchange rate fell to 67.49 in last month, the lowest level since October 2007, data compiled by JPMorgan show. The gauge surged to a record high 121.53 in April 1995.
As Japan ramps up monetary easing, signs of an improvement in the U.S. are signaling less need for central bank stimulus in the world’s largest economy. Charles Plosser, president of the Fed Bank of Philadelphia, said this week that he favors reducing bond purchases that have pumped more than $2 trillion into the economy and weighed on the dollar.
“Before Governor Kuroda dropped the stimulus bomb, dollar-yen had been driven mainly by the performance of U.S. economy and Fed policy,” said Ueno of Mitsubishi UFJ. “The current cycle could be the first one to be driven by domestic factors.”
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