Photographer: Tomohiro Ohsumi/Bloomberg

Yen Rallying to Record 75 Seen in Charts by Hedge Fund

  • BOJ failure to boost stimulus, end deflation to spur yen gains
  • Dollar ending year below 107 yen will push it lower: GCI Asset

The yen’s first annual rally in five years is on course to push it to a record versus the dollar in a few years as the Bank of Japan refrains from adding monetary stimulus and fails to end deflation, according to hedge fund GCI Asset Management Inc.

The BOJ is unlikely to cut interest rates further as it tries to help Japanese lenders cope in a sub-zero rate environment, which means the nation’s current-account surplus and deflationary economy would fuel further gains in its currency, said Tatsuhiro Iwashige, chief foreign-exchange strategist of the investment solutions group at Tokyo-based GCI Asset. The firm’s $100 million GCI Systematic Macro Fund surged 30 percent in the first half this year thanks to timely wagers on the yen and the pound.

The yen will enter a bullish chart pattern if it ends the year stronger than 107 per dollar, a key technical level, putting it on a path toward a record 75 in a few years, according to Iwashige. While the greenback briefly dropped to 99.02 yen on June 24 following the result of U.K.’s Brexit referendum, it’s mostly remained above 100 since then. The yen has climbed 17 percent in 2016 to 102.83 versus the greenback as of 11:19 a.m. Wednesday in Tokyo. It reached a post-World War II high of 75.35 in 2011.

“If the dollar breaks below 100 yen, a support line for a descending triangle, its decline would accelerate to as low as 92,” Iwashige said in an interview in Tokyo. “Fundamentally, if Japan can’t stop deflation and can’t strengthen monetary stimulus, the yen will strengthen because of current account surplus. It won’t be a surprise if the yen rose past 75 in a few years.”

After years of quantitative easing, followed by a surprise decision in January to adopt a negative interest rate policy, Governor Haruhiko Kuroda last month shifted the focus of the BOJ’s monetary stimulus from expanding money supply to controlling bond yields. The central bank’s reluctance to increase asset purchases, which are seen as key to weakening the yen, has fueled concerns it’s running out of ammunition, while uncertainty about the future pace of U.S. rate increases has capped the dollar’s upside.

The yen is headed for its first annual advance against the dollar since 2011 as demand for haven assets and the lack of additional BOJ stimulus boosted the Japanese currency.

The dollar crossed above its 20-year moving average versus the yen in 2014, which Iwashige identified as a potential bullish signal known as a golden cross. The pattern emerged after Prime Minister Shinzo Abe took office in December 2012 and started an economic revival program known as Abenomics. The yen fell to a 13-year low of 125.86 per dollar in June last year amid a combination of monetary easing, fiscal stimulus and structural reforms.

“Whether the dollar is above or below 107 on New Year’s Eve will show whether the golden cross proved to be false or not,” Iwashige said. “If the dollar ends 2016 at its year-lows, the probability is high technically for the yen to renew its historical peak in subsequent years.”

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