(Bloomberg) -- The yen’s furious rally in recent days looks to have catapulted the beleaguered currency out of an entrenched march lower, with many strategists seeing room for more gains.
The currency blew through the 156 per dollar level on Thursday for the first time since June, taking its advance to about 4% since suspected intervention by Japan last week helped jump start the yen’s climb.
The rebound threatens one of this year’s biggest macro short trades as investors firm in their conviction that the Federal Reserve will cut interest rates as soon as September. Expectations that rates will go higher in Japan in coming months are supporting the move, along with critical comments about the exchange rate by Donald Trump and a political heavyweight in Tokyo.
“Weakness in the yen is over,” said Jun Kato, chief market analyst at Shinkin Asset Management Co. which oversees ¥1.23 trillion ($7.9 billion). “With slowing US inflation, a cooling labor market and economic slowdown, the real interest rate differential between Japan and the US is narrowing noticeably.”
Trump said in an interview with Bloomberg Businessweek that the US has a “big currency problem” because of the weakness of yen and yuan. That’s raised the prospect that he may move to weaken the greenback if he were to win elections this year.
Meanwhile, Kono Taro, a ruling party lawmaker in Japan who has long said he aims to eventually become premier, highlighted on Bloomberg Television this week the problems generated by the yen’s sharp decline. Kono said that while a cheaper yen can help boost exports, the benefit to the country was now limited because many Japanese companies have production facilities overseas.
The rally may also go some way to assuaging the immediate concerns of authorities in Japan that they’ll have to keep defending the currency.
Estimates by Bloomberg indicate that Japan spent about ¥3.5 trillion on Thursday last week supporting the currency, and another ¥2.1 trillion the next day. This followed hefty intervention in late April and early May.
Yet traders still have to navigate a tricky path with US elections and rate divergence risks still lurking. Not everyone agrees that the worst is likely over for the yen.
“Whether the tide has turned in the yen market, the answer is yes in the span of the next few months, but in the longer term, it is too early to judge,” said Yujiro Goto, head of currency strategy at Nomura Securities Co. “It is premature to look for a trend reversal based on the current developments alone.”
The yen advanced as far as 155.38 to the dollar on Thursday before trading little changed at 156.31 at 2:31 p.m. in Tokyo. That still leaves it as the weakest performer by a long way against the greenback among Group-of-10 currencies, with a drop of around 10% this year to levels seen in the 1980s.
Interest rate differentials are likely to continue shifting back in favor of the yen, wrote Jonas Goltermann, deputy chief markets economist at Capital Economics. “Eventually, we expect that to lead to a sustained rebound in the yen,” said London-based Goltermann, who sees the currency strengthening to 145 by year’s end.
In Singapore, Homin Lee is also expecting the yen’s advance to gain momentum.
“We do think the yen will eventually stabilize a bit in medium-term given its exceptionally cheap valuation and steady improvement in Japan’s long-term economic fundamentals,” said the Asia macro strategist at Lombard Odier.
--With assistance from David Finnerty, Saburo Funabiki and Masahiro Hidaka.
(Updates prices. Note: a previous version of this story was corrected to fix the currency conversion in the fourth paragraph.)
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