The yen's biggest annual slump against the dollar in seven years may be nearing an end if the history of Federal Reserve rate increases is any guide.
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The Japanese currency has recently shown a tendency to strengthen at the beginning of Fed hiking cycles - in a buy the rumor, sell the fact manner - sometimes bringing an extended period of weakness to an end. In 2021, the yen fell more than 10% against the dollar as traders positioned for the U.S. central bank to raise interest rates as soon as May while the Bank of Japan stands pat.
This time round factors such as a potential reopening of Japan to overseas tourists, U.S. mid-term election risk and speculation over who will replace BOJ governor Haruhiko Kuroda could give a boost to the yen, just as the hiking cycle gets underway. There is the possibility that traders may be pricing in a policy error by the Fed, which could lend a haven bid to the Japanese currency.
Tohru Sasaki, head of Japan markets research at JPMorgan Chase Co in Tokyo, said the dollar-yen tends to go up until the Fed raises rates and falls when it actually happens. The dollar-yen is seen rising to around 117 around mid- 2022 and peaking when the U.S. starts raising rates. The yen is likely to remain under pressure over the first part of the year, with a move above 120 per dollar possible, according to Yujiro Goto, head of foreign-exchange strategy at Nomura Holdings Inc. It would mean a 4% decline in the currency, which traded around the 115 per dollar level in Asia trading Monday.
The widening growth gap between the U.S. and Japan, due to tighter restrictions to control the spread of the coronavirus, will continue to pressure the yen, according to Daisuke Karakama, chief market economist at Mizuho Bank Ltd.
Japan keeps restrictions that weigh on economic activities and there is no hope that Japan can fill this difference in 2022, eroding the appeal of Japanese assets and keeping the currency weakest of major peers, he said. I'm a dollar bull and see Japan as a laggard among developed nations. According to the latest Commodity Futures Trading Commission data, the speculators seem to have the same view, with trader positioning set to end 2021 with a sizable net short yen position.
This year, that positioning could come under pressure if there is even the slightest hint of Japan joining global peers and pulling back from its unprecedented monetary policy stance.
Most players are seen betting on the BOJ's policy shift semi-permanently, so any doubts, not real action, about that could move the yen, given the massive short positions accumulated, said JPMorgan s Sasaki.
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