Yen’s Climb Versus Won Seen Unwinding on Trade: Market Reversal

The yen’s world-beating advance against the South Korean won is set to reverse, trading patterns suggest, as Japan’s record trade deficit contrasts with a surplus for its Asian neighbor.

Japan’s yen has climbed 6.2 percent versus its Korean counterpart this year, the biggest gain among 31 major currencies, reaching a more than two-month high of 10.771 won on Feb. 4. A measure known as the relative-strength index signals Japan’s currency is at its most overbought level since May 2012, while strategists surveyed by Bloomberg predict it will slide 10 percent to 9.545 won by year-end.

Investors seeking a haven from a slump in emerging markets drove the yen higher this year, offsetting the depreciating effects of the Bank of Japan’s attempts to stimulate growth by flooding the economy with cash. They are ignoring the weakening demand for the yen indicated by the drop in Japan’s current account balance, while South Korea’s figure sets a record.

“The yen profited from the risk-off environment in the past week, but we’re expecting the yen to revert to weakness from the yen-won perspective,” Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd., said in a Feb. 5 phone interview. “Japan is still continuing with powerful monetary easing,” and “that will continue to put some downward pressure on the yen.”

Bollinger Band

The yen’s 14-day RSI versus the won climbed to 73 on Feb. 3, above the 70 threshold that signals a reversal may be imminent. Japan’s currency has also remained above or just below the upper limit of its Bollinger band against the won since Jan. 23, data compiled by Bloomberg show.

Developed by John Bollinger in the 1980s, this indicator is used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is small.

The yen may decline about 6 percent to 10 won, from 10.592 as of 12:25 p.m. in New York, according to a forecast by IG Markets Securities Ltd. The firm cited trading patterns including the pair’s 200-day and 21-day moving averages, which were at 10.910 and 10.365 yesterday.

“The rapid yen-won rise which has seen it breaching some key resistance levels recently is starting to look overdone on the RSI,” Junichi Ishikawa, a Tokyo-based analyst at IG Markets said in a Feb. 5 phone interview.

‘Support’ Level

“If the yen fails to break its 200-day moving average or above the significant 11 level, that may signal a reversal to a weakening trend,” Ishikawa said. “It could test 10 if it breaches its 21-day moving average, which has been acting as a support since the beginning of this year.”

Japan hadn’t had an annual deficit in its current account, the broadest measure of trade because it includes investments, since at least 1985. That meant the nation was less reliant on foreign capital and made the yen a haven from financial turmoil.

This may eventually change, partly as a result of Japan having to spend more on importing fuel after the meltdown of the Fukushima nuclear plant in 2011. The country’s Ministry of Finance is due to release December figures on Feb. 10.

“Our medium to long-term view that the yen will weaken against the won has not changed,” Junya Tanase, a currency strategist in Tokyo at JPMorgan Chase & Co., said by phone on Feb. 5. “The yen continues to be the best funding currency that will be offered when there’s an upturn in risk appetite. The yen’s weakness is fundamentally justified.”

Emerging Markets

Any decline in Japan’s exchange rate will depend on the extent to which emerging markets stabilize, after a slowdown in Chinese manufacturing and the Federal Reserve’s withdrawal of its unprecedented stimulus spurred a slump in developing-nation currencies. Japanese Cabinet Secretary Yoshihide Suga said this week that uncertainty in the developing world is a factor behind a drop in domestic stocks, which should weigh on the yen.

The BOJ has bought about 7 trillion yen ($69 billion) of government bonds each month since April in a bid to push inflation up to 2 percent within two years. Its South Korean counterpart will raise its benchmark interest rate by year-end, according to a survey of economists.

“The rout in emerging markets is causing a quite significant amount of position adjustments,” Craig Chan, the head of foreign-exchange strategy for Asia excluding Japan at Nomura Holdings Inc., said in a Feb. 4 Bloomberg Television interview. “We’re seeing the short yen-won trade being unwound over the past two weeks,” though “over the medium term, I do expect Korea to perform relatively strong, particularly against the Japanese yen.”

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