Yen Gains Limited as Momentum Dwarfs Year-End Flows: Analysis

Photographer: Tomohiro Ohsumi/Bloomberg

Options traders don’t expect any Japanese yen repatriation flows in the run-up to Japan’s financial year-end to halt recent dollar gains versus the yen, a sign the currency pair may have reached a medium-term bottom at 110.99, Bloomberg strategist Vassilis Karamanis writes.

Monetary policy divergence between Japan and the U.S., and technical charts indicate that risks to the dollar-yen spot price may lie to the upside. Japanese investors often repatriate some of their foreign holdings ahead of the fiscal year-end on March 31, which offers support to the yen.

Yet, a dollar-yen seasonality chart shows the greenback has strengthened in the last two weeks of the Japanese fiscal year since 2009. 

mar 17 seasonality

Moreover, options traders don’t see any such flows as a game-changer. Dollar-yen implied volatility in the three-week tenor traded at 9.77 percent yesterday, near its one-year average and way off the 17.93 percent high seen on Dec. 12. There was also virtually no difference between the three-week tenor and two-week tenor, whose expiry date was March 30 as of yesterday.

The risk-reversal curve, a gauge of market positioning and sentiment, still favors yen strength over the greenback, though it has eased lately. 

Finally, the probability of a larger move ahead in the spot rate has been steadily declining since mid-February, as indicated by the 10-delta butterfly.

Bank of Japan Governor Haruhiko Kuroda signaled yesterday that further rate cuts may be in place, highlighting prospects of wider monetary policy divergence. At the same time, the market is still pricing a lower Federal Reserve rate-hike trajectory than the one anticipated by Fed officials.

Technical analysis also points to the possibility that the dollar may strengthen past resistance at 115 versus the yen, should the year-to-date low support yet again. The Ichimoku cloud provides strong bullish signals, while momentum indicators are also dollar-supportive. 

mar 17 ta

CFTC data show leveraged funds’ positioning has shifted to yen longs for the first time in more than three years, leaving ample room for funds to add to dollar longs.

Note: Vassilis Karamanis is an FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

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