Yen in Rut as Fed-Rate Drumbeat Pushes Against Stalled Abenomics

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The yen is being pushed and pulled between the prospect of higher U.S. interest rates and speculation the Bank of Japan won’t be adding to its own stimulus anytime soon.

The yen has closed no more than 0.1 percent stronger or weaker on each of the three days through Tuesday, even as a report Aug. 17 showed gross domestic product contracted last quarter. Economy Minister Akira Amari said the same day he doesn’t expect the government to add fiscal stimulus.

Traders have cut expectations for price swings in dollar-yen over the next three months by the most among major currencies in 2015. The yen was little changed at 124.36 per dollar at 7 a.m. New York time, compared with a 13-year low of 125.86 set on June 5.

“The market is in a really comfortable spot right now, and a catalyst seems to be lacking from either side,” said Chris Weston, Melbourne-based chief market strategist at IG Ltd. “Does the yen deserve to be at 130 per dollar? Probably not. Does it deserve to be around 124 or 125? Probably. I’d say this is around fair value, and the market is dictating that at the moment.”

Implied volatility in the yen versus the dollar dropped to 8.4 percent Wednesday from about 12 percent in January. Japan’s currency weakened 0.1 percent to 137.28 per euro.

BOJ Governor Haruhiko Kuroda has said the currency is already very weak, signaling a reluctance to push it even lower. While weakening the currency boosts the nation’s exports, it also cuts consumers’ spending power by making imports more expensive.

Kuroda Line

Investors are wary of what’s known as the Kuroda line at about 125 yen, which is where the currency was on June 10 when the central bank chief said he couldn’t see it depreciating much more when adjusted for inflation and trade.

“There is limited scope for the yen to weaken further given the current valuation,” said Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo. “We are expecting the yen to be range-bound.”

Barclays predicts the yen will strengthen to 123 per dollar at year-end, though Kadota said risks are skewed toward a stronger U.S. currency heading into the Federal Reserve’s September meeting. The median forecast among analysts surveyed by Bloomberg is for the yen to end the year little changed at 125 per dollar.

There is pressure for the yen to appreciate longer term. It’s alone among major peers in commanding a premium on options to protect against an appreciation versus the dollar in the next three months.

The yen has gained about 1.3 percent versus the dollar since reaching a 13-year low in June. It has maintained the gains even as futures show the odds of a Fed rate increase in September are at about 50 percent.

“People are waiting for September,” said Emma Lawson, senior currency strategist at National Australia Bank Ltd. in Sydney. “They want to see what the Fed actually does there.”

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