The yen is the worst-performing major global currency, but is likely to make a dramatic U-turn in 2023. Some investors see the twin forces behind the yen’s depreciation, the aggressive Federal Reserve and the dovish Bank of Japan, flip the situation.
The yen, which has been favored as a short currency against the dollar for much of this year, could rise more than 7% from current levels next year, according to Barclays and Nomura Holdings. Fontbell Asset Management estimates the fair price to be less than 100 yen to the dollar. This will make the yen more than 30% stronger than today. State Street Global Markets expects the yen to rebound sharply as fears of aggressive rate hikes in the US ease; expressed the opinion that there is
“The yen’s weakness against the dollar is probably nearing its peak,” said Sebastian Page, head of global multi-asset at T. Rowe. “By being aggressive, we will surprise the market,” which could send the yen higher.
The rally on the yen is in stark contrast to September, when hedge funds were building up short positions on the yen like never before. The yen’s decline against the dollar since the beginning of the year has temporarily reached 25% as the yield gap widens between the United States, which has continued to raise interest rates at a rapid pace, and Japan, which has kept interest rates extremely low.
But the yen is up more than 12% from its October lows, boosted by market interventions by the government and the Bank of Japan and by expectations of a slowdown in rate hikes by the US Federal Reserve. Speculation that the Bank of Japan will adjust its policy under the new governor after April could also stimulate the yen’s rebound.
A stronger yen could send hundreds of billions of dollars back to Japan and hurt Japanese exporters, and the impact goes beyond Japan. Demand for carry trades that use the yen as a funding currency will also decline.
The exchange rate of the yen on the 5th was about 135 yen to the dollar. In October, the yen depreciated to 151.95 yen for the first time in 30 years.
Many of the expectations for a stronger yen are based on the notion that US interest rates are rapidly approaching a peak and that officials will be forced to cut rates in the event of a recession. Funds like Jupiter Asset Management and Aberdeen are likely predicting it next year.
Hachidai Ueda, director of product specialists at Aberdeen Standard Investments, said he expects US authorities to quickly become relatively dovish in 2023, with the yen climbing to 130 against the dollar. He said the dollar didn’t have the strength to go up like he did this year.
Futures markets have suggested that US interest rates will peak around the middle of next year.
Funds also said it was only a matter of time before the BOJ, the last major central bank in advanced economies to stick to its accommodative policies, buckled. That will likely come after Governor Haruhiko Kuroda leaves office next April, but it will give more impetus to the yen’s appreciation, said Marc Nash, Jupiter’s London-based investment manager. “At some point next year, obviously, Japan will raise interest rates,” he said, adding that the dollar could rise to around 120 yen.
Foreign funds’ preferred 10-year yen swap rate rose well above the 0.25% limit on 10-year government bond yields set by the Bank of Japan. This indicates that traders expect the Bank of Japan to adjust its yield curve control (YCC) policy.
Sonal Desai, chief investment officer for fixed income at Franklin Templeton, said he expects the BOJ to end its grip on 10-year yields in the next three to six months: “Towards a decline, the yen will rise,” he said. said.
The combination of monetary policy normalization and a still-cheap yen will quickly restore the yen’s safe-haven status as well. The yen outperformed in the last few days of November as worries about China’s coronavirus response fueled demand for safe-haven assets.
Sven Schubert, senior investment strategist at Vontobel, said he expects these trends to pick up as market fears of a downturn spread. “A recession in the US is likely to lead to a flight to quality, which could be a boon for the yen,” he said. He also sees the Swiss franc as a safe-haven asset, but said the yen’s starting point is “more extreme” because of this year’s decline.
Original title:The Year’s Big Yen Short Set For A Dramatic U-turn In 2023(extract)