After bottoming around Y101.60 in mid June, dollar-yen has made slow progress higher, underpinned by U.S. Treasury yield stabilization as well as hopeful views about the Japanese economy and ongoing expectations of Japanese investor outflows.
Nevertheless, the pair has struggled to maintain a toehold over Y102 recently and may be unable to break above Y103 in the near-term, let alone soon revisit the 2014 highs near Y105.44, seen Jan. 2, traders said.
The recent run-up in the Nikkei 225, has been one factor keeping dollar-yen firm, even though the correlation between the two instruments is not as tight as it once was, analysts said.
The Nikkei 225 closed at 15,376.24 Tuesday, down from the 15,442.67 peak posted Monday, which was the highest level seen since Jan. 24.
At today’s close, the Nikkei is up 10.7% from the 2014 low of 13,885.22, seen April 11, and up 10.1% from its more recent low of 13,964.43, seen May 21, although down 4.9% from the 2014 high of 16,164.01, seen Jan. 6.
In contrast, at current levels around Y102.05, dollar-yen is up only 1.2% from it’s most recent lows of Y100.82, seen May 21, and is off 3.2% from the 2014 highs seen in early January.
It comes as no surprise that dollar-yen vols are at all-time lows, observed Kit Juckes, senior currency strategist at Societe Generale.
“The correlation between USD/JPY and both the Nikkei and U.S. Treasury yields has collapsed in recent weeks, as USD/JPY is now correlated with a flat line instead,” he said in a research note.
The move “reflects the Abe administration’s optimism that the economy has turned a corner, and some will see the ability of the Nikkei to rise without the help of a falling currency as a positive sign,” he said.
Juckes maintained that “the next major leg of yen weakness could now be postponed until 2015, when further BOJ easing seems likely,” but at the same time, stressed “it would be depressing to miss an earlier move.”
Dollar-yen held at Y102.05 Tuesday, in the middle of a tight Y101.82 to Y102.17 range.
The pair will need to vault the June 4 peaks at Y102.80 and then the May 2 peaks at Y103.02 for upward momentum to mount, traders said.
On the plus side however, after a brief dip during a few days in May, dollar-yen has managed to vault and close above its 200-day moving average, currently at Y101.67, which suggested scope for further gains, they said.
The market Tuesday was looking more favorably at Japanese growth prospects.
Japan’s government earlier formally adopted an updated growth strategy, seeking to keep deflation at bay and revitalize the economy in an aging society by implementing deregulation and regulatory reform.
“The economic recovery is not reaching all corners of the country. That’s why we cannot let this year’s positive business cycle end as a temporary one,” Prime Minister Shinzo Abe told reporters. “It’s all up to implementation of our growth strategy which we upgraded boldly today.”
Various pro-growth measures have already been decided at government councils, so there was no surprise in the official announcement of the strategy, which was first drafted a year ago. See MNI mainwire at 6:52 a.m. ET for details.
The “lack of surprise” in the growth strategy unveiled by Prime Minister Abe Tuesday, “should ultimately be good news for dollar-yen,” said Osamu Takashima, G-10 strategist at CitiFX.
Abe’s initiatives may have a mixed effect on the yen, with Government Pension Investment Fund reform likely to be yen negative, while lowering the corporate tax rate below 30% from the current level around 35.6% should be a yen positive.
On the GPIF reform, Takashima said, “We don’t think such gradualism should change FDI flows especially.”
“In addition, so as to lower the corporate tax as well as ensure fiscal funding, the Abe government will be eventually be forced to determine the second round consumption tax hike,” he said.
This should act as “a greater headwind for the economy and could pave the way for long-lasting monetary easing by the BoJ, or even additional measures beyond 2014,” which “is likely to result in an eventual JPY negative,” Takashima said.
In terms of FX direction, while the yen has been modestly firm versus the euro, it has been largely flat versus the dollar recently, said strategists at Bank of New York Mellon.
However, BONYM client iFlow data “reveals the bigger story,” which has been the “gains the JPY has made in the past month versus higher yielding and riskier currencies such as the South African rand, Turkish lira, Indonesian rupiah, Indian rupee and Hungarian forint, to name a few,” they said
The BONYM iFlow data has seen steady inflows into yen since mid-May, they said.
“First, we believe that receding chances of another round of quantitative easing by the Bank of Japan have led to currency market participants relinquishing their net short JPY positions,” the strategists said, noting also that “incidentally, higher oil prices further lower the probability of more QE by the BOJ.”
This is evident not only in BONYM’s iFlow data, “which is predominantly real-money investor activity (our iFlow FX indicators confirm net outflows from the IDR, TRY, ZAR, INR in recent weeks)” but also in the CFTC’s positioning data, which showed that speculative accounts have trimmed their net short positions in the past week.
In addition, “there appears to be an ongoing debate amongst money-managers as to which of the G-3 currencies might be more suitable to fund carry-trades,” BONYM said.
“As a result, the dollar and the euro are now vying with JPY in a race to the bottom as a ‘low-yielder’, so the yen does not necessarily weaken as much as it used to during periods when investors seek higher yielding assets,” the strategists said.
Looking ahead, in terms of potential dollar-yen drivers, the market will eye the July 1 Tankan release.
Credit Suisse strategists looked for the Tankan’s diffusion indexes for current business conditions to deteriorate significantly in June from the March survey.
“More specifically, we expect the DI for large non-manufacturers to drop to +9 in line with the demand slowdown triggered by the April consumption tax hike, and the DI for large manufacturers to fall to +16 owing to the recent sluggishness of exports,” the strategists said.
This compares to expectations of +17 and +24 respectively in March.
“We expect the corporate sector’s expected one-year-ahead inflation rate (for general prices) to inch up from +1.5% to +1.6% as a consequence of backward-looking expectations formation,” they said.