Yen at 120 Lonely Call No More for Analyst Who Got It Right

  • AMP Capital, BNP Paribas see yen surpassing 125.86 low
  • U.S.-Japan yield differential to drive yen: Bank of America

BNP's Saywell Sees Dollar-Yen at Record-High 1.28

Calling for a weaker yen was a lonely post six months ago for Royal Bank of Scotland Group Plc’s Mansoor Mohi-uddin. Now the Singapore-based strategist is getting plenty of company from others who are joining him in forecasting the currency will slide to 120 per dollar.

While Bank of America Corp. expects the yen to reach that level at the end of 2017, Sydney-based asset manager AMP Capital Investors Ltd. and BNP Paribas SA are even more bearish, predicting a slump past the 13-year low of 125.86 reached in June last year. Morgan Stanley sees the Japanese currency at 130 by mid-2018. In the options market, the premium on contracts to buy yen in three months fell to the lowest level since November 2015.

The yen has weakened more than 7 percent since the Nov. 8 U.S. election, the worst performer among developed-market peers. President-elect Donald Trump’s promise of fiscal stimulus has sparked a selloff in Treasuries, widening the gap between benchmark U.S. yields and their Japanese counterparts to the most since 2011, boosting the appeal of American assets.

“That yield differential is really going to drive dollar-yen up,” said Claudio Piron, Bank of America’s co-head of Asia currency and rates strategy in Singapore. “The yen is going to be the most interest-rate sensitive out of the G-7 currencies.”

Adding Bets

Nader Naeimi, who heads a dynamic investment fund for $119 billion asset manager AMP Capital, said he would add to his bearish yen bets should the currency strengthen to 108.

“There is a strong possibility of a short-term retracement,” said Naeimi, who started wagering against the yen before the U.S. election. The yen’s slide “won’t be in a straight line,” he said.

Japan’s currency surged 1.2 percent to 111.82 per dollar at 12:39 p.m. in Tokyo, after underperforming its 16 major peers this quarter. The relative strength index on the dollar-yen pair -- a technical indicator that uses past trends to contextualize market moves -- signals the greenback’s recent surge may have been excessive. The 14-day RSI jumped to 85 last week, its highest point since September 2014, and readings above 70 indicate an asset, in this case the dollar, has been pushed too far and may retreat.

Options traders are paying less to bet on the yen’s advance. The premium for three-month contracts to buy the Japanese currency versus the greenback over those to sell reached a one-year low of about 0.3 percentage point last week, risk-reversal prices compiled by Bloomberg show. On Nov. 8, the right to purchase the yen cost 1.8 percentage points.

For Morgan Stanley, the yen is the top currency to sell as the Bank of Japan’s move to target the yield curve should allow differentials to widen versus the U.S., analysts led by the firm’s London-based chief global currency strategist Hans Redeker wrote in a report dated Nov. 27. The New York-based firm forecasts the currency will slump to 125 at the end of next year and depreciate further in the following six months to 130, a level last seen in 2002.

BNP Paribas expects the currency to weaken more than 10 percent to 128 next year, the most pessimistic forecaster surveyed by Bloomberg.

Hedge funds and other large speculators have trimmed bullish bets on the yen from the record high of 71,870 contracts reached in April. Positions that benefit from gains in the currency exceeded those benefiting from losses by 20,676 contracts in the week ended Nov. 15, falling for a third straight week, according to the Commodity Futures Trading Commission in Washington.

Top Performer

Even after this month’s losses, Japan’s currency remains the best performer among developed-market peers in 2016, gaining support earlier this year from the country’s current-account surplus, which makes it an investor favorite in times of turmoil. It rallied to as high as 99.02 in June for the first time since 2013 after Britain voted to leave the European Union.

BOJ Governor Haruhiko Kuroda announced in September a shift in policy aimed at pegging the yield on 10-year Japanese government bonds near zero. In the U.S., the market sees an interest-rate increase by the Federal Reserve next month as a certainty, while futures show a more than 60 percent chance of additional moves by June.

“In 2017, the dollar will trade in a higher 110-to-120-yen range on the back of faster Fed hikes and the BOJ keeping 10-year JGB yields around zero,” said RBS’s Mohi-uddin, who predicted in the first half of this year that the yen’s rally was running out of steam. “The stronger the dollar trades, however, the more the Fed may decide to keep to only a gradual pace of tightening.”

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