The two-month freefall of the yen looks to be over as slow growth in China and expected damage to the US economy from Federal Reserve hikes bolster its credentials, strategists say.
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The currency jumped by almost 1.9% to 127.52 per dollar Thursday, extending its rebound after it plummeted to 131.35 against the dollar last week, its weakest level in nearly two decades. The move came even as the U.S. currency soared against most peers in haven-inspired trading.
Declines in Treasury yields in recent days have helped weigh on the dollar against the Japanese currency, even if not against other counterparts, while the yen s haven status seems to be reasserting itself to some degree as US stocks take a beating. The yen has been among the most battered this year, and that adds up to a good recovery for the currency.
Australia New Zealand Banking Group Ltd. said it sees the yen recovering after the swoon in US stocks sends Treasury yields lower, removing a major driver of dollar strength. The one-way decline in the yen is over, according to Barclays Securities Japan Ltd., while Shinkin Asset Management Co. reckons the currency could come back to around 125 per dollar.
Market sentiment has changed since the Dow broke a key chart point that held it in an elevated range despite aggressive Fed rate hikes, said Hiroyuki Machida, director of Japan foreign-exchange and commodities sales at ANZ in Tokyo. An adjustment in risk assets has taken place and that is fueling yen buying as the market shifts to a risk-off trend. Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo said that the outlook on the yen is improving due to global-growth negatives, including the Ukraine situation, the impact on the US economy from aggressive rate hikes and Chinese lockdowns. The sluggishness of central banks may spur flight-to-quality buying to help cap US yields. There seems to be little reason to push Treasury 10 year yields back above 3%, as that level reflects markets fully pricing in the Fed's policy outlook, Kato said. The yen is likely to trade in a range of 128 to 133 per dollar before markets decide the next direction, which may include it appreciating to test 125, he said.
The yen has a lot of room to recover. The Bank of Japan has kept its dovish tone even as other central banks tightened policy, so the currency is still down more than 10% against the dollar this year. The yen has suffered as rising commodity prices have hurt the outlook for Japan's resource-importing economy.
The one-way upward path in dollar-yen looks to be turning around as markets may not be aggressively pricing in successive rate hikes due to concerns about China's growth slowdown, he said.
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