The yen has gained for a third week, the longest streak since the five days ended Sept. 4. That move has come even after Bank of Japan Governor Haruhiko Kuroda unexpectedly adopted negative interest rates at the end of last month, sparking speculation the central bank may intervene to arrest the currency’s gains.
Japanese authorities will find it “very difficult” to step in should the yen’s appreciation accelerate before Group-of-20 finance ministers and central bankers meet next weekend in Shanghai, said Mansoor Mohi-uddin, senior markets strategist in Singapore at Royal Bank of Scotland Group Plc.
The premium for options protecting against gains by the yen, compared to those insuring against a loss, rose to near the highest since 2010, three-month risk reversals show. Dollar- yen’s 14-day relative strength indicator is, however, close to 30, a level that some traders view as a signal the currency has reached extreme levels and may reverse.
Forecasters are also unconvinced that yen strength will be sustained. Goldman Sachs sees the yen weakening to 120 per dollar “in the near term,” and 130 by year-end, Goldman analysts led by chief currency strategist Robin Brooks wrote in a note to clients Friday.
The median of more than 50 estimates compiled by Bloomberg calls for the yen to slump to 120 per dollar by the end of March, and to 123 by year-end.
Japan has negative interest rates and a central bank with an unabashed mandate to devalue the currency and yet the Yen is receiving safe haven flows. Yes, Japan still has a current account surplus but deleveraging is a more important consideration.
Zero interest rate, abundant supply and ample opportunity to invest for a better return elsewhere encouraged traders to engage in carry trades. With high yield bond spreads widening and stock markets in a corrective phase leveraged traders have been put under pressure. The strength of the Yen can be seen more as a barometer of global risk appetite than any particular desire to hold the currency.
The Dollar pulled back to test the region of the February 11th low and will need to bounce from this area to confirm a return to demand dominance beyond the short-term bounce.
The South Korean Won also made headlines today as the Dollar rallied to break away from the KRW 1200 area reasserting its medium-term uptrend. This represents an additional reason why Japan may wish to intervene to weaken the Yen.