Yen Tumbling 9% Splits Top Forecasters From Futures: CurrenciesJohn Detrixhe and David Goodman
The most accurate foreign-exchange forecasters expect the yen to fall about 9 percent this year to levels not seen since 2008, putting them in opposition to futures traders who are paring bets on a decline.
Norddeutsche Landesbank, Macquarie Bank Ltd. and Banco Santander SA, which are all calling for Japan’s currency to tumble to 110 per dollar by year-end from 101.09 as of 12:36 p.m. New York time, were among the five top-ranked forecasters last quarter, according to data compiled by Bloomberg. The median estimate in a Bloomberg survey of 74 banks, investors and brokers is a less-bearish 105 level.
After the yen’s more than 20 percent depreciation since September, futures traders are seeing less scope for similar declines without more evidence that Japan will be able to boost its economy while eradicating deflation with stimulus measures that tend to debase one’s currency. For the strategists, the Asian nation is already generating evidence of success.
Japan “is getting closer to inflation and not deflation,” Stefan Grosse, an economist at NordLB, the No. 1 forecaster, said in a July 3 phone interview from Hanover, Germany. “The key is that the U.S. will exit their quantitative easing.”
The yen weakened beyond the 100 per dollar threshold this year for the first time since 2009 as Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda implemented an unprecedented bond-buying program to help combat years of deflation. At the same time, the Federal Reserve is signaling that it’s prepared to reduce its quantitative-easing measures.
“When a central bank is printing money, the canvas on which we paint our forecast would be one of currency weakness,” Stuart Bennett, the head of Group of 10 currency strategy in London at Banco Santander, the No. 4 forecaster, said in a July 3 phone interview. “Bearing in mind the Bank of Japan’s plan is to double its balance sheet, they would probably want it to continue to weaken, but maybe at a gradual rate which doesn’t frighten its peers.”
Japan’s currency has weakened 9.1 percent this year, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. It has gained 2.5 percent since sliding to an almost five-year low of 103.74 per dollar on May 22. It last depreciated to less than 110 on Aug. 25, 2008.
After NordLB, a 200-year-old, state-owned lender, Canada’s Bank of Montreal and Macquarie Bank were the second- and third-most accurate currency forecasters in the Bloomberg Rankings survey for the second quarter. Canadian Imperial Bank of Commerce came in fifth, after Banco Santander.
Betting on a weaker yen has been a favorite trade for hedge funds. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain increased to 99,769 contracts on May 31, the most bearish level since July 2007, figures from the Washington-based Commodity Futures Trading Commission show.
So-called net shorts have since been reduced to 61,462 contracts on June 25, the least since Feb. 12, after the yen strengthened to as much as 93.79 per dollar on June 13. Bets against the yen rose to 70,736 as of July 2.
Paul Tudor Jones, who runs the macro hedge fund Tudor Global BVI, which rose 9.5 percent this year through June 7, has told investors the yen may not depreciate much further, according to his clients. His Tudor Investment Corp., based in Greenwich, Connecticut, oversees about $13.5 billion.
Further weakness in Japan’s currency may depend on whether investors find Abe’s legislative growth strategy, known as the “third arrow” after monetary and fiscal stimulus, to be credible. The reforms, which may be presented later this year, include deregulation of the health, energy and infrastructure sectors.
“Abe will quickly implement” the reforms, NordLB’s Grosse wrote in an e-mail on July 2. The increasing difference in yields between Treasuries and Japanese government bonds “will help to depreciate the yen further as will the better shape of the American economy,” he wrote.
Yields on 10-year Treasuries reached 1.88 percentage point more than similar-maturity Japanese government bonds on July 5, the most since July 2011, data compiled by Bloomberg show.
“The macro dynamic and monetary policy dynamic are still suggesting yen weakness is the game to be playing,” Sacha Tihanyi, a currency strategist at Scotiabank in Hong Kong, said today in a Bloomberg Television interview. “We’re still looking for 105 by the end of this year,” Tihanyi said in reference to the dollar-yen exchange rate.
Under Kuroda, the BOJ is rolling out unprecedented monetary easing to halt more than a decade of deflation, measures that weakened the yen and helped make Japan the best-performing major stock market this year.
At his first policy meeting in April, the governor pledged to double monthly bond purchases to about 7 trillion yen ($69 billion), focused mainly on longer-maturity government debt. The stimulus program under his predecessor, Masaaki Shirakawa, who stepped down in March, focused on notes maturing in one to three years.
Fed Chairman Ben S. Bernanke said June 19 the U.S. central bank may start dialing down QE this year and end it entirely in mid-2014 if the economy achieves what it considers to be sustainable growth. The Fed is buying $85 billion of Treasuries and mortgage bonds a month.
The best forecasters were identified by averaging the individual scores on margin of error, timing and directional accuracy across 13 currency pairs in the four quarters ended June 30. Forecasters had to be ranked in at least 8 of the 13 pairs to qualify for the overall ranking. Forty-five companies qualified.
NordLB had a score of 62.6, while Bank of Montreal’s BMO Capital Markets unit posted a 62.32, followed by Macquarie’s 61.7, Banco Santander’s 60.02 and Canadian Imperial Bank of Commerce’s 57.37. BMO sees the yen at 105 per dollar by year-end, while CIBC has a forecast of 102.
The top yen forecaster was Germany’s Landesbank Baden-Wuerttemberg, which predicted a drop to 105 per dollar by year-end, Bloomberg data show. Faster inflation will drive Japanese investors into other countries’ bonds, according to Matthias Krieger, a Stuttgart, Germany-based senior economist at LBBW.
“A lot of Japanese investors will shift their portfolios from JGBs to foreign-currency denominated bonds and this should weaken the yen,” Krieger said July 3 in a phone interview. “If the world economy should stabilize, and that’s our forecast, then Japan should overcome deflation and this would happen even without the new policies of the Shinzo Abe government.”