Yen Bears Awaken as Trump Win Hands Kuroda Unexpected Gift

  • ANZ lowers its year-end forecast to 110 per dollar from 105
  • Yen set to weaken ‘after the dust settles,’ says AMP’s Naeimi

Currency Market Awaits Donald Trump's Agenda

Donald Trump’s victory in the U.S. presidential election is starting to look like surprisingly good news for Bank of Japan Governor Haruhiko Kuroda.

Defying the predictions of many that the yen would rally after a Trump win set off a dash for haven assets, the currency instead dropped in the two days after the vote, reaching a 3 1/2-month low. What’s more, the promise of fiscal stimulus in the U.S. has sparked a selloff in Treasuries, sending U.S. yields to the highest since January 2014 relative to those on Japanese government bonds and boosting the relative appeal of American assets. That’s good news for Kuroda as a weaker yen may help his efforts to revive domestic inflation.

Yen bears are taking note. Australia & New Zealand Banking Group Ltd., which was among the top forecasters of the currency last quarter, cut its year-end forecast to 110 per dollar from 105. Credit Agricole SA’s corporate and investment-banking unit now sees the yen weakening to 108, instead of strengthening to 102 by the end of 2016.

“After the dust settles, the yen will most likely start weakening,” said Nader Naeimi, who heads a dynamic investment fund for $119 billion asset manager AMP Capital Investors Ltd. in Sydney and is holding on to his bets for a weaker Japanese currency. A Trump administration will boost spending and spur U.S. economic growth, weighing on the yen versus the dollar, he said. “The yen is expensive now, it’s crowded.”

Few saw the world’s third-most traded currency weakening immediately after a Trump victory. A majority of analysts surveyed before the election said the yen would surge to 100 per dollar in that scenario, and it did initially rally to peak at 101.20, before a U-turn that sent it to 106.95 on Thursday, the weakest since July 21. It also closed below its 200-day moving average for the first time this year.

Treasuries suffered their steepest two-day slump in almost six years as president-elect Trump is seen ramping up spending to boost the economy, potentially widening the budget deficit and stoking inflation. The extra yield 10-year U.S. debt offers over similar-dated Japanese securities jumped 0.35 percentage point this week, the most since June 2013, to 2.2 percentage points. The market-implied probability of a December interest-rate increase by the Federal Reserve jumped above 80 percent, after falling to less than 50 percent as election results showed Trump winning the presidential race.

The U.S. central bank will likely tighten policy in December, before Trump is sworn in, according to Lee Ka Shao, who co-founded hedge fund Cavenagh Capital, which was backed by the biggest Dutch pension fund.

“If the Fed does not act, it will only make markets wonder why they are so worried about a Trump presidency and acting on such concerns even before he takes office,” Lee said.

He covered all his “Trump win risk-off bets” in currencies and equity indexes Wednesday as the yen rallied and U.S. stock-index futures tumbled when early results signaled Trump might win. Lee, who trades his own money and that of his wealthy clients, then put on a bet the Japanese currency would decline once the rally took it to 101.30 per dollar. He closed the position Friday and started wagering for the yen’s gain after it failed to breach past 107.

The Japanese currency has rallied on at least six occasions this year to unwind declines, and yen bulls are pulling in their horns. Eisuke Sakakibara, the Asian nation’s former top currency official, says it may climb to 90 per dollar within six months because the new U.S. president won’t want a strong greenback.

“Trump’s ‘America first’ stance means weak dollar policies,” the 75-year-old professor, dubbed “Mr. Yen” for his ability to influence the exchange rate in the 1990s, said in an interview Thursday in Tokyo. “Gradual dollar weakness and yen strength are going to continue.”

The yen’s slide this week has pushed the currency below consensus forecasts for the end of 2016 levels by the most in three years, data compiled by Bloomberg show, though few strategists have changed their calls since the election.

ANZ lowered its forecasts for the yen because a recovery in commodity prices will reduce the scale of Japan’s trade surplus and global volatility should be contained, encouraging Japanese investor outflows, said Daniel Been, Sydney-based head of foreign-exchange research at ANZ. An increase in real rate differentials between the U.S. and Japan will also weaken the yen, he said.

ANZ now predicts a further drop to 115 in 2017, reversing a bullish projection of 100.

“In a fundamental sense, the yen looks set to turn,” Been said. “The risks for dollar-yen are now skewed higher.”

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