Photographer: Tomohiro Ohsumi/Bloomberg

For Yen Bulls, Kuroda-Yellen Double Bill Is No Show-Stopper

  • Currency has surged 18% this year, best performer in G-10
  • Traders favoring yen gains over 3 months, risk reversals show

It seems almost nothing can put foreign-exchange traders off the yen -- not even two of the world’s most powerful central bankers.

The currency is enjoying its best week since July versus the dollar on speculation Bank of Japan Governor Haruhiko Kuroda will have little new to offer when he and his board set policy Sept. 21. And after a slew of weaker-than-expected U.S. data, markets see a diminishing chance that Chair Janet Yellen will raise interest rates at a Federal Reserve meeting ending the same day.

The yen has surged 18 percent since December, the best performer among Group-of-10 currencies, confounding most strategists after it dropped for a fourth straight year in 2015. Japan’s central bank governor had played a part in that unprecedented slump as he deployed record stimulus to try to combat deflation. Now traders are skeptical the BOJ has much ammunition left with a majority positioned for the yen to strengthen by year-end and options contracts also pointing to gains.

“It’s difficult to expect any bazooka stimulus from the BOJ this month,” said Shuji Shirota, head of the macroeconomic strategy group at HSBC Securities Japan Ltd. in Tokyo. “Weak U.S. data makes a Fed rate hike this month very unlikely, while markets will become conscious of the BOJ’s limits, potentially pushing the yen past 100 per dollar after the BOJ meeting.”

BOJ Review

The yen was at 101.57 per dollar as of 7:36 a.m. in New York, having appreciated 2.3 percent this week. The currency advanced to 99.02 on June 24, the strongest level since November 2013.

The BOJ said in July it will unveil a “comprehensive review” of its policy framework at its September meeting. That sparked speculation it could make some reduction in its accommodative stance, or go the other way and bolster stimulus after admitting the current program has failed to achieve its inflation target. The announcement didn’t lead to any lasting weakness for the currency.

“Rather than act this month amid the likelihood of inaction from the Fed, the BOJ will keep the cards for later,” said Jun Kato, a senior fund manager at Shinkin Asset Management in Tokyo. “It may offer a forward looking vision for policy options to sustain easing expectations at later meetings. Exporters’ selling of the dollar is putting the yen under pressure to strengthen beyond 100. The BOJ will have no cards left if the yen reaches 90.”

Traders Split

While traders are split over whether the yen will weaken or strengthen in the next month, they are keeping positions that would benefit if it appreciates over the forthcoming quarter. The premium for three-month options to buy the currency against the dollar over the cost of those to sell is 1.2 percentage points, according to risk-reversal prices compiled by Bloomberg.

Hedge funds have boosted bets to the highest in eight years that the yen will appreciate. They held a net 57,380 bullish yen contracts in the week ended Aug. 30, the most since July 2008, according to data from the Commodity Futures Trading Commission.

Signs the Fed will delay raising interest rates are also propelling the yen. Worse U.S. payroll data on Sept. 2 than analysts had forecast spurred futures traders to cut bets policy makers will tighten this month -- and there was a further reduction this week after data showed an anemic expansion in U.S. services industries. There’s a 22 percent chance of a move in September, down from 34 percent odds on the day before the jobs report, according to data compiled by Bloomberg based on fed fund futures.

Rate Outlook

“Monetary policy in Japan and the U.S. are unlikely to help weaken the yen,” said Satoshi Okumoto, Tokyo-based chief executive officer and president at Fukoku Capital Management, which oversees the equivalent of $19 billion. The U.S. economy is sound but it’s not in a condition to see successive rate increases, he said. “It’s difficult to anticipate a sharp yen depreciation given such an outlook for U.S. interest rates.”

The future for the yen is also positive based on technical analysis. The currency has stayed stronger than its 100-day moving average all year apart from the three days after the Bank of Japan announced its negative interest-rate policy on Jan. 29.

“The yen is likely to appreciate if it is left to the market,” Fukoku Capital’s Okumoto said. “Japanese remain slightly cautious about taking currency risks and investing overseas, while flows from real money point to the yen’s appreciation due to moves to bolster exports and earn money from overseas investment and operations.”

Before it's here, it's on the Bloomberg Terminal.