Yen Divide Grows as JPMorgan, Eaton Vance Weigh Drop: Currencies

To Eaton Vance Corp., a tumble in the yen that pushed it to a seven-year low is far from over. JPMorgan Asset Management Inc. isn’t so sure.

The opposing views underscore growing divisions in the foreign-exchange market following the Japanese currency’s 15 percent plunge since mid-year to 119.35 per dollar as of 12:40 p.m. in New York, after reaching 121.85 yesterday, the weakest since July 2007. Strategist estimates compiled by Bloomberg range from a drop to 130 to a rally to 105 by mid-2015, a 25-yen gap that compares with the 17-yen divergence at the start of November.

While speculation rises that the Bank of Japan will step up its efforts to pull the economy out of recession through currency-depreciating measures such as an expansion of the money supply, the debate now is whether that’s already reflected in the yen’s price. Volatility is the highest since September 2013.

“Some people are becoming sensitive to the fact that the dollar-yen is trading above 120 when very few people thought it would be at this level two months ago,” Shahab Jalinoos, the New York-based global head of foreign-exchange strategy at Credit Suisse Group AG. The firm sees the yen at 120 by the end of the first quarter, he said.

Three Arrows

Prime Minister Shinzo Abe has overseen about a 30 percent slump in the yen since taking office in December 2012 and pursuing his so-called three arrows policy of monetary easing, fiscal spending and structural reforms aimed at reviving growth.

Japan’s government is considering an extra budget worth as much as 3 trillion yen to spur the economy, according to people involved in the discussions, who asked not to be named because the talks were private.

The yen slid 5.3 percent last month, its biggest decline since January 2013, after the BOJ unexpectedly raised its annual target for enlarging the monetary base to a record 80 trillion yen ($662 billion) on Oct. 31. The losses accelerated as the world’s third-largest economy slipped back into recession.

Eric Stein, who oversees about $13 billion at Eaton Vance in Boston, isn’t so sure the yen’s declines will be over anytime soon. It may depreciate toward 125 per dollar if an anticipated increase in U.S. interest rates leads to higher Treasury yields, luring investors away from Japanese assets, he said.

“I still think it’s possible to make money shorting the yen,” Stein said on Dec. 4, referring to positions speculating on a drop. “That said, certainly a chunk of the easy money has already been made.”

Net Shorts

Hedge funds and other large speculators anticipate further depreciation in the yen, pushing net-short positions to 111,160 contracts in the week ended Dec. 2, according to the Commodity Futures Trading Commission in Washington. That’s up from 67,399 in October and approaching the most since January.

Options prices suggest the scope for further declines is diminishing. Traders pay 0.09 percentage point more for one-month yen options anticipating a drop than for contracts betting on a gain, down from 0.61 on Dec. 4, which was the highest closing price since May 2013. They’re optimistic only about the yen among the dollar’s 16 major currencies.

“The majority of the weakening move in the yen has now occurred,” Roger Hallam, the London-based chief investment officer for currencies at JPMorgan Asset Management, said by e-mail on Dec. 4. It’s unlikely “that dollar-yen will trade significantly higher.”

Hallam, whose firm oversees $1.7 trillion and has a “modest underweight” position on the currency, said there’s money to be made whichever way it moves. The diverging opinions have boosted price swings in the yen more than its peers, which he said “provides trading opportunities from both a long- and short-yen perspective,” meaning whether it rises or falls.

Implied Volatility

Three-month implied volatility in the dollar-yen rate, a measure of anticipated changes in values, jumped to 11.75 percent yesterday, the highest since September 2013 and up from a record 5.15 percent on July 16, based on closing levels in data compiled by Bloomberg.

The median of more than 50 strategist forecasts compiled by Bloomberg suggests the yen will trade at 120 per dollar by the end of June. Back on Nov. 1, when the yen was at 112 the median estimate was also for virtually no change by mid-year, as estimates ranged from a drop to 120 to a gain to 103.

Yen Bankruptcies

The pace of the yen’s declines has rattled some government officials because it increases import costs for businesses and threatens the public’s living standards. Forty-two of the companies that failed in November cited the yen’s drop as a contributor, bringing the total number of bankruptcies associated with the currency this year to 301, almost triple that of the same period in 2013, according to Teikoku Databank.

Finance Minister Taro Aso said last month the currency’s slide has been “too fast.”

Derek Halpenny, the London-based European head of markets research at Bank of Tokyo-Mitsubishi UFJ, said yesterday that Japan’s currency is “looking oversold at current levels” and may be due a “temporary” rally. The firm sees a 3 percent gain to 117 per dollar by mid-2015, according to a Dec. 1 forecast.

“The scale and aggressiveness of what the BOJ has done has resulted in extreme selling,” Halpenny said on Bloomberg Radio. “But perhaps it’s over-extended at these levels and there’s some scope for a rebound.”

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