Bets on yen weakness scaled back

Currency investors and strategists say the prospect of a weaker yen against the dollar rests on a sharper divergence between central bank policies in the US and Japan.

The Japanese currency has been locked in a narrow band in recent months against the dollar, with market expectations for further depreciation of the yen being scaled back, according to the most recent positioning in the futures market.

In the near term, the direction of the currency rests in part on policy meetings being held this week by the US Federal Reserve and the Bank of Japan. Market expectations for US interest rates being increased are for a delay until the end of the year due to recent lacklustre economic data, while the BoJ is likely to downgrade forecasts for growth and inflation.

Neil Mellor, currency strategist at BNY Mellon, said the dollar/yen currency peg had "gone nowhere", adding that futures data were "indicative of the growing view of the speculative market that the yen isn't just a one-way bet".

Despite the drop in forecasts for Japanese economic data due this week, BoJ governor Haruhiko Kuroda has expressed some optimism on the state of the Japanese economy, making it unlikely that new stimulus measures will be announced at the meeting.

Roger Hallam, chief investment officer for global currencies at JPMorgan Asset Management, said: "On a medium-term view, the yen is very cheap on a PPP [purchasing power parity] basis,'' but he added that the economy remains vulnerable.

"The evidence is a bit mixed. There is still only very tentative evidence to signify a long-term inflationary impact," he said.

Some strategists are particularly wary about the BoJ springing a surprise, given Mr Kuroda's announcement of the October QE programme expansion just days after declaring his policy was well placed.

Jane Foley, Rabobank G10 currency strategist, said: "If Kuroda is maintaining his upbeat assessment on the economy with the aim of supporting inflation expectations, there is a risk that the market can be blindsided by a policy announcement again."

The BoJ's increased stimulus programme announced last October saw the yen fall sharply against the dollar over two months, but since the start of 2015, the currency pair has loitered in a range between Y115 and Y122.

Data published on Friday in the latest Commitment of Traders (CFTC) report showed net yen short positions of 14,000, the lowest level since October 2012. Last October, that figure was 120,000.

While betting against the yen has been scaled back, the prevailing view among traders is that the yen will ultimately depreciate, with some looking for an expected monetary policy tightening by the US Fed.

Ms Foley forecasts the yen to move to Y126 against the dollar in the next 12 months.

According to Mr Mellor: "It is just a matter of time that dollar-yen goes higher . . . In the long term, US interest rates will start to rise and the reality is that divergence will weigh on the market."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation