Yen primed for rise towards 100 as Fed stimulus saps dollar

Bloomberg

The yen’s advance this week may be a sign of things to come, with strategists in Tokyo saying the currency could climb towards 100 against the dollar in the next few months.
Citigroup Global Markets Japan Inc. says the yen stands to gain as the Federal Reserve’s massive monetary stimulus weighs on the greenback. MUFG Bank Ltd. sees the risk of a worsening coronavirus pandemic forcing Japanese funds to dump overseas assets and snap up the haven currency.
“The yen may rise to around 100 in the April-June period as the sort of monetisation policies being used by the US exert pressure on the dollar, and focus returns to fundamentals such as falling US yields,” said Osamu Takashima, chief FX strategist at Citigroup Global.
The case for a stronger yen is also backed by its sliding options volatility and an easing of the recent global dollar crunch. That’s after the Fed boosted dollar supply, slashed interest rates to almost zero and pledged up to $2.3 trillion in loans as part of its unprecedented steps to cushion the US economy from the pandemic.
The surge in greenback demand abruptly halted the yen’s rally last month, after a rapid spread of the coronavirus sent the haven currency to a more than three-year high of 101.19 per dollar. It has lost more than 6% since to be at 107.95 as of 12:50 pm in Tokyo on Thursday.
The yen typically weakens at the start of Japan’s new fiscal year in April as investors allocate fresh funds to assets abroad. But a slump in US yields and rising hedging costs for European debt are seen deterring them this time. In fact, local funds sold a net 1.1 trillion yen of overseas bonds in the week ended April 3, the most in a year. The yen is up 0.5% so far this week.
There won’t likely be much outflows at least until Japan’s Golden Week holidays through May 6, said Yujiro Goto, head of foreign-exchange strategy at Nomura Holdings Inc. The yen may rise past 105 per dollar in the short-term, he said, without giving an exact time-frame.
The 10-year Treasury yield has plunged more than 100 basis points since the start of the year to 0.64%. The US economy went into a defensive crouch as the coronavirus swept through the country, according to a report released by the Fed in Washington on Wednesday, when separate data showed historic declines in the nation’s retail sales and factory output in March.
There is a risk that investors will be forced to sell foreign assets for cash should the pandemic linger on and weaken the financial system, according to Takahiro Sekido, chief Japan strategist and head of global yen strategy at MUFG Bank.
Japan’s external assets, including securities and direct investments, exceed 1,000 trillion yen, noted Sekido, a former Bank of Japan official. Since not all of that is currency-hedged, repatriation of a large portion of it could trigger an appreciation of 10 yen, he said.
“Asset liquidation by Japanese funds will lead to enormous repatriation pressures on the yen,” Sekido said. “We can’t rule out the risk of yen surging past 100 in the run up to fall.”
While things may be looking up in the near term, JPMorgan Chase & Co. says the yen is poised to weaken over the longer run as the coronavirus causes Japan’s trade balance to deteriorate.
The decline in exports is projected to more than offset the expected reduction in import costs due to the oil-price plunge, said Tohru Sasaki, head of Japan markets research at JPMorgan.
“The case is stronger for the yen to weaken over the longer-term,” he said. “Investors withholding foreign-asset purchases for now may also buy in the long run.”