(Bloomberg) -- Yen selling against the dollar tends to intensify when North America-based traders come online, an indication about the source of the biggest short-selling trades for Japan’s currency, a Bloomberg News analysis shows.
Tuesday is shaping up to be another day of dollar strength as US Treasuries continue to be sold, putting fresh pressure on the yen. Several Federal Reserve officials have also prescribed caution on the rate-cutting cycle, creating uncertainty about the pace at which the yield gap between Japan and the US will narrow. That opens the door for the yen to drop further, with its 200-day moving average, currently at 151.36, being the next target for investors.
“If the pair rises above the 200-day moving average, there will no longer be any point to hold it back from rising to around 155,” said Juntaro Morimoto, a senior currency analyst at Sony Financial Group Inc., referring to the dollar’s strengthening trend. On the other hand, “if the pair fails to break through this level and falls back, it will be difficult for it to rise further.”
The dollar-yen strengthened past the key psychological level of 150 after robust US economic data last week, as markets trimmed their bets on the immediate prospects for a Fed rate cut. The Japanese currency could face more selling pressure during North American trading hours, going by recent patterns.
The dollar-yen spikes during US hours are “clearly indicative that moves in US yields are the bigger drivers,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore, noting that US data and comments from Fed officials have been key drivers of the currency pair. “That can very much remain the case going into the US elections especially if betting markets continue to take up the odds of a Trump presidency.”
The yen weakened by as much as 0.2% to 151.10 on Tuesday afternoon, reaching its lowest level since July 31.
“Since the end of September, when US long-term yields began to rise, the dollar has strengthened and the dollar-yen has risen,” said Junichi Ishikawa, senior FX strategist at IG Markets.
“Expectations of a soft landing for the US economy are growing, and there is speculation that the US officials will slow the pace of interest rate cuts,” Ishikawa said. “The focus for the end of the year is how far the dollar-yen rate can rise in response to these market expectations.”
Japan’s lower house election on Oct. 27 is also creating uncertainty for the yen. Support for Prime Minister Shigeru Ishiba’s ruling coalition has ebbed ahead of the vote, hinting at an unstable administration and potential market tumult ahead.
“It is difficult to predict the impact of the lower house election,” said Morimoto. “The yen is likely to be volatile due to political speculation, so it may be hard to take a position before the election.”
--With assistance from Daisuke Sakai, Mark Cranfield and Ruth Carson.
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