(Bloomberg) -- The furious 24 hours of trading that capped the yen’s best month in more than a year-and-a-half have strategists at Amundi and TD Securities suggesting the currency may strengthen as far as 140 versus the dollar.
One of their peers at Macquarie Group Ltd. says “this formidable yen rally is only getting started” and the dollar-yen pair can get close to 140 by year-end, and all the way to 125 by December 2025. That would return it to levels last seen in early 2022, when the Federal Reserve had only just begun to hike interest rates.
While some strategists see the near-term risk of the yen giving up a large chunk of the gains made in recent weeks, the Bank of Japan’s rate increase Wednesday and the Fed’s signaling on rate cuts have washed away the sense of doom that hung over the currency for months.
“It can get to 140 if we see a confluence of factors: the start to the Fed’s easing cycle, bouts of risk aversion and a BOJ maintaining an unwavering tightening stance,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, US. “While that may seem to be a daunting hurdle, it really is not.”
The yen strengthened as much as 1% to 148.51 per dollar Thursday, having surged almost 1.9% on Wednesday to extend its monthly gain to more than 7%.
That’s a stark contrast with the first half of this year, when the currency slumped 12% in the worst performance among Group-of-10 peers, compelling Japan to step into the market to prop up the yen in April and May. The authorities spent ¥9.8 trillion ($65.6 billion) at that time, and another ¥5.5 trillion last month with buying that finally helped turn the tide.
“Tighter monetary policy in Japan will strengthen the feedback loop of the rebalancing towards local assets,” said Alex Loo, a macro strategist at TD Securities, which expects dollar-yen to reach 140 in the first quarter of next year.
Oversea-Chinese Banking Corp. sees the yen’s fair value at 136 per dollar, according to foreign-exchange strategist Christopher Wong.
Saxo Markets head of currency strategy Charu Chanana said there’s room for the yen to strengthen toward sub-145 levels this year, especially if volatility increases and carry trades unwind.
“The Fed is expected to cut interest rates and we see the BOJ raising rates to 0.75% next year,” said Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Japan in Tokyo. He sees the yen trading in the 140s zone.
Sebastian Boyd, MLIV Strategist: “The yen remains cheaper than it would be if the only thing weighing on it were rate expectations in the US and Japan. The yen has more upside from current levels, and the model suggests it should be trading a whole lot stronger than it is.”
Macquarie’s Gareth Berry predicts the yen will keep strengthening as popular carry trades that often involve selling the yen crumble.
“Over time, the Fed’s forthcoming easing cycle should undermine the whole point of being short the yen as an FX carry play,” the Singapore-based currency and rates strategist wrote in a note.
The yen has advanced against every major currency in the past month after wallowing near a 38-year low against the greenback in early July. Hedge funds drove a chunk of the rally after they beat a hasty retreat from selling the yen to fund purchases in higher-yielding peers such as the Mexican peso.
While there are expectations Japan’s yawning interest-rate differential is set to keep narrowing, investors will still need to navigate a bevy of risks, including the US election and the policy path for the BOJ and the Fed.
At around 0.25%, Japan’s benchmark rate is still far below that in the US, where central bankers left the federal funds rate in a range of 5.25% to 5.5% Wednesday. Swaps traders, though, are pricing in at least two US rate cuts this year, with the first likely coming in September.
Relapse Risk
Not everyone is bullish on the yen.
Some investors had said in the lead-up to the BOJ meeting that even if it did hike, there would still be a case for the yen to retain favor in carry trades.
The currency may weaken back toward the 155 level once market volatility subsides, according to abrdn.
“Sustained yen appreciation is unlikely without a US recession or more dovish Fed than what’s priced,” said David Zhou, investment director of multi-asset investment solutions at the money manager. “Odds favors yen strength to peter out.”
Fukuoka Financial Group Inc.’s Tohru Sasaki is also unconvinced the yen’s strength will stick. While the currency may advance in the short term, it may weaken toward the 160 level again when focus returns to rate differentials and economic fundamentals, he said.
“If real interest rates remain substantially negative and do not turn positive, I think it will be difficult for the yen to appreciate even in the medium to long term,” the chief strategist said.
Yet for many, the BOJ’s policy decision Wednesday, following on from its first rate hike in March, has changed the picture for the yen.
“The BOJ noted it ‘will accordingly continue to raise the policy interest rate’ if its economic outlook materializes,” Carol Kong, currency strategist at Commonwealth Bank of Australia wrote in a note. “This is a hawkish change from the March statement,” said Kong, who sees the yen trading at 145 by the fourth quarter of next year.
--With assistance from Matthew Burgess, Winnie Hsu and Hooyeon Kim.
(Updates with comment and more details)
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