Banknotes of Japanese yen are seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration
NEW YORK: The world’s worst-performing major currency looks poised for an impressive turnaround in 2023 as its two key drivers – a hawkish Federal Reserve (Fed) and dovish Bank of Japan (BoJ) – swap places in the eyes of some investors.
The yen – a favoured short against the dollar for a majority of this year – could rally more than 7% from current levels next year, according to Barclays Plc and Nomura Holdings Inc, while Vontobel Asset Management AG said fair value is below 100 per dollar – over 30% stronger.
State Street Global Markets sees a quick snap back as fears of aggressive US interest rate hikes recede, while T. Rowe Price said there’s scope for gains on a more hawkish BoJ.
“We are probably approaching peak yen weakness to the dollar,” said Sébastien Page, head of global multi-asset at T. Rowe, which oversees US$1.28 trillion (RM5.6 trillion) in assets.
When the Fed finally pauses on hiking, “there is room for the BoJ to surprise the market by being a bit more aggressive” on policy and boost the currency.
The bullishness is a marked change in tune from September when hedge funds couldn’t get enough of shorting the yen – a high profile casualty of the BoJ’s ultra-dovish monetary policy.
The widening yield gap between the United States and Japan, with the former hiking rates aggressively and the latter keeping them at rock-bottom levels to boost the economy, helped push the currency down as much as 25% this year.
Now a combination of direct market intervention from the Japanese government and hopes the Fed will slow its pace of rate hikes have helped the yen climb more than 12% from its October nadir.
Speculation over a potential policy tweak from the BoJ – which will be under new leadership from April – is likely to add fuel to that rebound.
A stronger yen would reverberate past the borders of the world’s third-largest economy, potentially siphoning hundreds of billions in dollars of capital back to the Japan while bludgeoning the bottom lines of the nation’s export giants.
It would also dampen demand for the popular yen carry trade – where investors borrow in the low-yielding Japanese currency to invest in ones with higher rates and pocket the difference.
The yen was trading around the 134.50 per dollar level yesterday – it hit a three-decade low of 151.95 in October.
Many bullish yen bets centre around the thesis that US interest rates are fast approaching a peak and the Fed may be spurred to ease in a downturn. For funds such as Jupiter Asset Management and abrdn, that’s a strong possibility next year.
“The Fed should change its tack to a relatively dovish side in a quick way in 2023,” said Hachidai Ueda, senior investment specialist of fixed income at abrdn, who expects to see the yen strengthen to as high as 130 per dollar.
“The greenback will “lack the driver to the upside which it had in 2022.”
Pricing in futures markets suggest traders see US rates peaking around the middle of next year.
Funds are also piling on wagers that it’s only a matter of time before the BoJ, the last major developed-market central bank clinging to dovish policy, will capitulate.
That’s likely to happen some time after governor Haruhiko Kuroda steps down in April, and will only further catapult the yen’s gains, said Mark Nash, money manager at Jupiter in London. — Bloomberg
