Yen Bulls Beware Says RBS Analyst Who Sees BOJ Surprise in June

  • ‘Investors are too bearish’ on dollar versus yen: Mohi-uddin
  • RBS meetings with Japan clients found most expect stronger yen

A Royal Bank of Scotland Group Plc strategist who called the yen’s rally back in October is now telling Japan’s biggest investors not to underestimate the central bank’s ability to weaken the currency.

Mansoor Mohi-uddin forecasts a decline to 110 to 120 per dollar in a few months. It was at 110.27 as of 3:02 p.m. in Tokyo. Bank of Japan Governor Haruhiko Kuroda has a track record of shocking the market and will probably expand buying of Japanese government bonds and exchange-traded funds as early as June, he said.

“Investors are too bearish on dollar-yen,” Mohi-uddin said in an interview in Singapore. “The BOJ will aim to undertake at least one more major round of easing in either June or July, with higher JGB purchases and much greater ETF buying likely to positively surprise investors.”

Modi-uddin met half a dozen of the largest life insurers and asset managers in Tokyo last week and found they are more pessimistic about policy makers’ ability to weaken the yen, and almost all seeing appreciation toward as strong as 100 per dollar. Sentiment is swinging in his favor in the options market, with traders the least bullish on the Japanese currency since November by one measure.

While the yen has weakened about 4.3 percent since reaching an 18-month high of 105.55 versus the dollar on May 3, it has strengthened more than 9 percent this year, threatening the central bank’s efforts to stave off deflation.

The BOJ will probably boost its annual stimulus program to 100 trillion yen ($907 billion) from 80 trillion yen, double purchases of ETFs and may cut the deposit rate from minus 0.1 percent in June or July, Mohi-uddin said. The prospect of interest-rate increases in the U.S. around the same time is also likely to stoke capital outflows and weaken the currency, as Japanese investors seek greater returns abroad, he said.

Policy makers have already pushed back their deadline for reaching 2 percent inflation four times in about a year, dealing a blow to Prime Minister Shinzo Abe’s plans to revive the world’s third-largest economy through a combination of monetary easing, government spending and business deregulation.

Stimulus Expansion

Over 90 percent of economists surveyed by Bloomberg last month predicted more BOJ easing by the end of July. The yen is set to weaken to 115 per dollar at the end of the year, according to median estimate of analysts compiled by Bloomberg. The most bullish forecaster, ING Groep NV, expects the currency to strengthen to 95 by the end of third quarter.

Nippon Life Insurance Co., Japan’s largest life insurer, in its investment plan, predicted the yen will trade between 110 and 120 versus the dollar in the fiscal year started April 1. Dai-ichi Life Insurance Co., saw the currency in a 100-to-120 range, while Sumitomo Life Insurance Co. had a forecast of 100 to 125. The firms made the predictions before the BOJ’s two-day policy meeting ended April 28.

Option Traders

Options traders are paying less to bet on the yen’s advance. The premium for one-month contracts to buy the Japanese currency versus the greenback over those to sell narrowed to 0.33 percentage point Wednesday, the lowest since November, risk-reversal prices compiled by Bloomberg show. On Feb. 9, the right to purchase the yen cost 2.8 percentage points, the most in almost six years.

Speculators are vulnerable to any policy shock after pushing wagers on a stronger yen to the most on record in April. Bullish bets on the currency by hedge funds and other large speculators exceeded those benefiting from losses by 71,870 contracts in the week ended April 12, the most in data going back to 1992, according to the Commodity Futures Trading Commission in Washington. They trimmed those bets to 59,047 as of May 10.

“The market is, in particular, underpricing the risks of a Fed rate hike and also the risk of further BOJ easing,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. in Singapore. The yen is set to weaken to 112 per dollar in three months, he said.

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