The yen could drop by close to another fifth to a level never seen since the last century, as it was already undervalued around a six-year low against the dollar.
Albert Edwards, a Societete Generale SA strategist who reckons the collapse of Japan's currency, reached 122.42 per dollar on Friday, is the lowest level since December 2015, which has the potential to take it to around 150 as traders get the bit between their teeth, according to the view of Societete Generale SA strategist Albert Edwards. Edwards believes that the yen's depreciation could have knock-on implications across the region and could spur further depreciation of China's yuan.
When the yen breaks, it moves sharply, he wrote in a note to clients. The yen could plunge from here as FX traders, stupefied by lack of FX volatility in recent years, see the yen s decline as a trading opportunity and climb aboard, despite being incredibly undervalued and oversold. The recent surge in the dollar against the yen has been fueled by rising Treasury yields as traders adjust to a more hawkish Federal Reserve trying to curb skyrocketing inflation. The yen is kept in check by a relatively dovish Bank of Japan, which shows little inclination toward raising rates even though the fallout from the war in Ukraine on commodity markets fuels price gains around the world.
Japan's exposure to higher oil prices as a net importer has resulted in a loss of its luster as a haven, failing to benefit from periodic bouts of risk aversion that the war has prompted.
The currency has fallen 6% against the dollar in 2022, the worst performer among developed-market peers. It pushed through 122 per dollar to touch a six-year low on Thursday.
When the yen falls, moves tend to be sharp, so a depreciation to the 150 per dollar mark isn't out of the question, according to Edwards. A move to that level would mark a decline of more than 18% from Thursday's low, which hasn't been breached since 1990.
The currency's attractive valuation ranks cheapest among major peers on a real effective exchange rate basis, according to data compiled by Bloomberg.
A small change in rhetoric from policymakers who have a tacitly weak yen policy could lead to a large reversal of sentiment, according to Gavekal Research analyst Udith Sikand.
The currency futures market shows that the short yen trade is getting increasingly crowded, and the real effective exchange rate is at its most undervalued in nearly half a century, and open interest data from the currency futures market shows that the short yen trade is getting more crowded, he wrote in a note Thursday. There is nothing more dangerous than a safe bet in the foreign exchange market. A further weakening of the yen could have major implications for China as well. Edwards said that Beijing may look to devalue its own currency in light of a weakening currency of a major regional competitor.
The People's Bank of China made a push to weaken the currency through its fixings and the prospects for further monetary easing are growing, with the yuan already under pressure. A resurgence of COVID 19 lockdowns and concerns about growth, and the renminbi, as the Chinese currency is known, could have room to go lower.
Edwards wrote that the super weak yen of 2013 -- 15, which drove down other competing Asian currencies, ultimately led to the renminbi devaluation of August 2015, and led to the super weak yen of 2013 -- 15. The renminbi is looking increasingly overvalued because of a weak yen.