Draghi Replaces Kuroda as Banker Currency Bulls Dread

Mario Draghi is assuming Haruhiko Kuroda’s mantle as the central banker currency bulls dread.

Speculation the Bank of Japan governor will hold off on further monetary stimulus while his European counterpart presses ahead helped the yen jump 4.9 percent versus the euro this year. Bets on the euro’s decline against the dollar by hedge funds and other large speculators exceed bearish yen wagers for the first time since November 2012, Commodity Futures Trading Commission data show.

European Central Bank President Draghi lowered one of the euro region’s key interest rates to below zero for the first time last month and pledged further liquidity to help the economy. At the same time, a majority of economists surveyed by Bloomberg say they don’t expect the BOJ to expand its record stimulus this year.

“The ECB looks closer to additional easing than the BOJ,” Minori Uchida, head of global-market research at Bank of Tokyo-Mitsubishi UFJ Ltd., said by phone on July 9. “If negative interest rates introduced last month prove insufficient to weaken the euro, the ECB will probably take additional steps toward the end of the year.”

Both central bankers have sought to boost the money supply, weakening their currencies and making exports more competitive. They’re also on a mission to stave off deflation, or a drop in consumer prices, which crippled Japan’s economy in the 1990s.

Diverging Fortunes

Draghi is stepping up monetary easing measures just as the effects of about 7 trillion yen ($69 billion) of monthly government bond purchases that Kuroda unveiled at his first meeting as BOJ chief in April 2013 are fading.

The euro has fallen almost 3 percent versus the dollar from a 2 1/2-year high in May, buying $1.3609 as of 2:52 p.m. in New York. The yen has gone in the opposite direction, rising to 101.34 per dollar, up about 4 percent from a five-year low in January. One euro bought 137.90 yen, down from 145.69 in December, the most since 2008.

With no additional BOJ easing, “the yen is likely to struggle to weaken,” said Shinichiro Kadota, a Tokyo-based foreign-exchange strategist at Barclays Plc, which sees Japan’s currency little changed at 102 per dollar by year-end and the euro down almost 6 percent to $1.28. “With the ECB showing such commitment, we see the euro weakening from here.”

Trading Places

Speculators’ net-short positions on the yen versus the dollar fell to 58,686 contracts in the week to July 1, from 135,228 at the end of 2013, according to the CFTC in Washington. Bets on a euro decline stood at 60,776, reversing 30,589 net longs on Dec. 31.

The ECB cut its main refinancing rate to a record 0.15 percent and started charging for deposits at its June policy meeting. At the July 3 gathering, Draghi provided more details on the targeted bank loans that are being introduced and reiterated his commitment to boosting inflation to just below 2 percent, from 0.5 percent in June.

Bloomberg surveys of economists show that for the first time a minority expect additional BOJ easing by the end of this year. In a poll this month, 35 percent said the central bank would add to stimulus at one of two meetings in October, down from 42 percent in a June survey.

Further Stimulus

Expectations of further ECB stimulus through quantitative easing may limit the euro’s decline, according to Masashi Murata, a currency strategist at Brown Brothers Harriman & Co. in Tokyo. “European stocks, particularly German equities, could also rise,” he said by phone on July 9.

Murata said the euro may weaken to $1.34 by year-end and the yen to 103. The company’s forecast is for the euro to drop to $1.30 by Dec. 31 and for the yen to be at 101.

With a gauge of euro-region manufacturing falling to a seven-month low in June, pressure is building for the ECB to add to the stimulus it has already unveiled.

The BOJ, by contrast, may consider that it doesn’t need to ease policy further as its measures bear fruit for the economy, if not for the yen. Core inflation accelerated to 3.4 percent in May, the fastest pace in 32 years, after the government increased the nation’s sales tax. Gross domestic product grew 1.6 percent in the first quarter, the most since 2011.

Paring Forecasts

Strategists surveyed by Bloomberg are paring forecasts for a decline in the yen. The median of more than 50 estimates is for a drop of more than 4 percent to 106 per dollar by year-end, compared with an estimate of 110 in January. A similar survey on the euro predicts a decline of 3 percent to $1.32.

Mitsubishi UFJ now also sees the yen at 106 by year-end, from a forecast of 110 at the end of April, Uchida said.

“The BOJ has resisted a lot of the market pressure for easier policy,” though it may extend stimulus in 2015, Steve Barrow, Standard Bank Plc’s London-based head of Group-of-10 research, said in a July 10 interview. “While at the start of the year we might have anticipated dollar-yen perhaps pushing up to 120, I think that’s more looking like a two-year forecast now. For the end of the year we’re still looking for a higher dollar-yen, but toward 110.”

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