Yen Approaches 18-Month High as Traders Weigh BOJ Policy Limits

  • Currency surged 6.8% in first quarter amid negative BOJ rates
  • Yen is a `buy on dips,' Bank of Tokyo-Mitsubishi says

Safe-Haven Yen Near 18-Month Highs

The yen climbed toward the strongest level against the dollar in almost 18 months, extending last quarter’s gains as its appreciation spurred concern about the limits of monetary policy in weakening a currency.

Japan’s currency appreciated 6.8 percent in the first quarter, signaling that three years of stimulus have been priced in. Concerns about a global economic slowdown have prompted investors to buy yen this year. The BOJ’s surprise Jan. 29 decision to adopt negative interest rates has failed to rein in the rally.

“The yen has captured all the caution about the global economy that investors were building up earlier in the year,” said Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York. “The BOJ hasn’t been able to drive it weaker.”

The yen appreciated about 0.3 percent to 111.34 per dollar as of 5 p.m. New York time, nearing the strongest since October 2014. It gained 0.3 percent to 126.81 per euro, extending a 0.7 percent jump at the end of last week.

“It’s probably fair to say there is building skepticism over the BOJ’s ability to weaken the yen unless they adopt even more radical measures,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “External events can dominate yen direction well beyond the control of the Japanese central bank. Yen is now seen as more of a buy on dips.”

Bank of Tokyo-Mitsubishi expects the yen to strengthen to 110 per dollar by the end of the year.

That prediction goes against the consensus, which is for the dollar to climb by the end of 2016, in part on the view that the Federal Reserve will raise interest rates while the Bank of Japan maintains stimulus. The median estimate among analysts polled by Bloomberg is for the yen to weaken to 118 per dollar by the end of 2016.

The dollar remained lower Monday after reports showed declines in U.S. durable goods orders and factory orders. A Bloomberg gauge that tracks the greenback versus 10 peers was little changed after declining 1.6 percent last week.

U.S. employers added more workers last month than projected and wages strengthened, a Labor Department report showed last week. Job gains and nascent signs of inflation are bolstering the argument for higher borrowing costs. Futures traders are betting that the Fed will lift rates as soon as later this year, after boosting them from near zero in December.

“Dollar-yen could revert back to 120 by the end of the year,” said Stefane Marion, chief economist in Montreal at National Bank of Canada. “Most of that will be driven by some tightening in the U.S.”

Demand for haven currencies is set to wane because U.S. economic data have improved and worries about financial market instability have receded, said Todd Elmer, a Singapore-based foreign-exchange strategist at Citigroup Inc.

Bloomberg’s dollar index tumbled 3.9 percent last month, the most in more than five years, after the Fed pared projections for rate hikes at its March meeting and Chair Janet Yellen said last week the central bank will “proceed cautiously” due to heightened risks in the global economy. 

The yen is set to weaken past 115 per dollar because the government may announce further fiscal stimulus before the end of May and as Japanese investors, faced with declining yields at home, add foreign assets, Elmer said. Investors should consider betting against the Japanese currency, he said.

“The underlying factors are moving against the yen,” Elmer said. “Now is probably a good time to look at shorts,” he said, referring to bets the currency will weaken.

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