Yen Posts Strongest Week Since July as Goldman Remains a Bear

Updated on
  • Japan’s currency has risen in spite of BOJ’s policy tweaks
  • Dollar undermined since Fed refrained from raising rates

The yen posted its biggest weekly rally since July as traders speculated the Bank of Japan lacks the ammunition to successfully implement its tweaks to monetary policy.

There were dissenters, with Goldman Sachs Group Inc. sticking to its view for declines in the Japanese currency. Yet the yen touched the strongest level in a month this week as the BOJ announced Wednesday it would target the shape of the Japanese government bond yield curve rather than focus on expanding the money supply.

The yen is rallying against the dollar because “the BOJ failed to deliver what the market was hoping for,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co. “Dollar-yen is going to go through the 100 yen level. The BOJ will stand pat and not intervene.”

The yen weakened 0.3 percent at 101.02 per dollar as of 5 p.m. in New York, while the 1.2 percent weekly gain was still the biggest since July 29. It climbed to 100.10 on Thursday, the closest it’s come to breaching the 100 threshold since August. Japan’s currency is the best performer among its Group-of-10 peers this year, with a 19 percent jump against the dollar.

Dollar Losses

The greenback was undermined this week, with the Bloomberg Dollar Spot Index falling 0.6 percent, as the Federal Reserve refrained from raising rates on the same day as the BOJ meeting. It also scaled back its predictions for interest-rate increases in 2017 and beyond.

“The yen looks pretty well supported around 100, but we expect it to break that in the medium term,” said Shinichiro Kadota, a Tokyo-based foreign-exchange strategist at Barclays Plc, which predicts an advance to 99 per dollar by year-end. “The market is still trying to figure out the impact of the BOJ decision, and if the Fed is really going to hike in December.”

Japanese officials stepped up efforts to talk down the yen, whose gains make it harder for the authorities to meet their targets on growth and inflation.

Chief Cabinet Secretary Yoshihide Suga said Friday that foreign-exchange market moves have been very sensitive, and that officials are ready to react if the situation continues. A day earlier, the nation’s top currency official, Masatsugu Asakawa, said speculative currency movements are undesirable, and officials are watching markets closely after seeing nervous moves.

Differing Views

Goldman Sachs projects Japan’s currency will weaken to 108 by year-end. The median forecast in Bloomberg’s yen survey puts Japan’s currency at 104, 3 percent weaker than now. Still, the only contributor to change its year-end outlook since the BOJ announcement -- Norddeutsche Landesbank -- strengthened it to 102 per dollar, from 105.

“We expect the rally in the yen to reverse, as this policy shift should help address market concerns about the scarcity of JGBs, thus increasing the sustainability and credibility of continued monetary accommodation,” Francesco Garzarelli, the London-based co-head of global macro and markets research at Goldman, said in a note.