(Bloomberg) — A rift is opening on Wall Street over the direction of the yen.
On the one hand, Goldman Sachs Group Inc., Mizuho Americas Inc., JPMorgan Chase & Co. and Bank of America Inc. see Japan’s currency at its lowest level in more than 30 years. The other one? Apparently everyone else does. The median forecast for the yen is that it will reach 140 yen to the dollar by the end of the first quarter, and 130 yen by the end of 2024.
Indeed, analysts are now more divided than at any time since 2016, according to an analysis of currency forecasts compiled by Bloomberg, which compares the highest and lowest forecasts for each quarter over the following six months.
At the heart of their disagreements is a disagreement over the outlook for the U.S. economy and its impact on the U.S. dollar, the most traded currency against the yen. Those who expect the Fed to keep interest rates high expect the dollar to appreciate at the expense of the yen. By contrast, many companies expecting a stronger yen see a U.S. recession and a weaker dollar as inevitable.
This may seem ironic, given that there has been much debate over when the Bank of Japan will tighten its ultra-easy monetary policy and the country’s ability to intervene in foreign exchange rates. Yen bears argue that what really matters is the fate of the dollar.
“What will change the direction of the yen will probably be more about what happens in the U.S. than what the Bank of Japan does,” said Johann Garde, chief executive officer of Saxo Bank Japan.
“You can see that last year we had interventions at about the 150 level, and now we’re back to about the 150 level,” Gade said. “So from a long-term perspective, these interventions have a limited lifespan unless we follow up on the real drivers of the weakness in interest rate differentials.”
Thanks to the Fed’s most aggressive tightening cycle in a generation, that gap is now near its widest in more than two decades, in contrast to the Bank of Japan’s continued negative policy rate. . As a result, U.S. Treasury yields soared and the dollar strengthened against low-yielding currencies such as the yen.
It is this dynamic that Bank of America is betting on the yen to further weaken. BofA strategists say the Japanese currency is so tied to the U.S. central bank’s own policy cycle that it can’t do anything but fall. Shusuke Yamada, head of Japanese currency and interest rate strategy at the bank, said, “The yen will continue to depreciate until there is a higher possibility of a Fed rate cut.”
BofA expects the yen to reach 155 yen to the dollar by the first quarter. This is also the level that a former foreign exchange official said is when the government “starts to get concerned.”
It was around 149.80 yen in morning trading on the Tokyo market on Wednesday.
In contrast, Citi’s FX strategists have the most bullish view. They predict that the yen will rise to 130 yen to the dollar in six to 12 months from now. Dirk Wheeler, the firm’s head of global macro emerging strategy, said their view is predicated on a U.S. recession and some tightening by the Bank of Japan, which would ultimately drive yields lower.
Another possible driver of the yen’s rise, the Bank of Japan’s tight monetary policy, remains uncertain. There are growing signs that the central bank may raise its inflation outlook later this month, but it is difficult to tell whether this will prompt the Bank of Japan to adjust anytime soon. Economists surveyed by Bloomberg expect the policy rate to remain at -0.1% until the second half of next year.
Since Japanese authorities intervened last fall, there has been little concrete effort to influence the value of the yen so far this year. Some thought the sharp rise in the Japanese currency, which hit 150 yen to the dollar in early October, was evidence of intervention, but officials declined to confirm. The currency’s rise did not last long, and the yen gradually depreciated.
Masato Kanda, Japan’s top monetary authority, said on Monday that in principle, raising interest rates is one way the country can respond to capital outflows, adding that measures will be taken if currency movements become excessive. .
Such rhetoric means traders must bet on the yen through the lens of the Fed’s interest rate cycle. Predictions about whether the U.S. central bank will raise interest rates again this year and when they will start lowering them as growth slows have been wavering, with the odds increasing to 50-50 in recent days.
“The bottom line is it’s very close at the moment, but the broader question is what level of interest rates should be set to cool economic activity and ensure inflation is back on target,” said Tiffany Wilding, an economist at Pacific Investments. and whether financial conditions are really necessary.” Management recently told Bloomberg TV: “Bond markets and the Fed are still searching for that level.”
Much depends on whether the strategist makes the right decisions. After unexpected forecasters caused the yen to soar late last year, many people entered 2023 expecting a strong yen. Instead, the currency has weakened against all 10 major economies and has already fallen more than 12% against the dollar since January.
“We were in the camp that thought the yen would do well this year given the US policy peak, and the idea that Japan would almost inevitably have to adjust its normalization trajectory on its own. We must acknowledge that we belonged to the Aninda Mitra, macro investment strategist at BNY Mellon Investment Management in Singapore, said:
Mitra sees room for the yen to reverse early next year. However, he warns that if the Fed chooses to raise the U.S. benchmark interest rate again, the currency could fall to 155 yen.
(Wednesday’s Japan’s inflation outlook, economist survey on Bank of Japan’s negative policy interest rate, and yen level against the dollar updated.)
More stories like this can be found at bloomberg.com
