Prospects for Yen Strength as the US Approaches Pivot Month
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As the United States enters a month of 'pivot'?a shift in direction?ending over two years of aggressive tightening in monetary policy, there are forecasts that the yen could remain strong against the dollar throughout this year.
The key indicator to gauge the yen-dollar exchange rate outlook is the interest rate differential between the U.S. and Japan. The logic is that if the previously high U.S. interest rates decline, the attractiveness of holding dollars in deposits and other instruments decreases, causing the yen to appreciate. The market fully expects the U.S. Federal Reserve (Fed) to cut the benchmark interest rate at the Federal Open Market Committee (FOMC) meeting on the 17th-18th (local time), with a 100% probability (25 basis points at 68.5%, 50 basis points at 31.5%). Additionally, Bank of Japan (BOJ) Governor Kazuo Ueda hinted at the possibility of further tightening policies during his appearance before the Japanese parliament on the 23rd of last month, stating that if the economy and inflation align with forecasts, another rate hike could be planned.
Accordingly, global investment banks are consecutively betting on the yen's appreciation against the dollar. The yen was one of the representative global currencies that showed a weak trend, depreciating about 12% against the dollar in the first half of this year.
Christopher Wong, a foreign exchange strategist at Singapore Chinese Bank, revised the year-end yen-dollar exchange rate forecast downward from 141 yen per dollar to 138 yen. A lower yen per dollar rate means the yen has appreciated against the dollar.
Macquarie Group offered the most optimistic outlook on the yen, significantly lowering its year-end forecast from 142 yen per dollar to 135 yen. The last time the yen-dollar rate was at 135 yen was in May of last year.
Standard Chartered Bank predicted the yen-dollar exchange rate will reach 140 yen per dollar by the end of this year and fall to 136 yen per dollar in the first quarter of next year. Regarding the current yen-dollar rate, Standard Chartered strategists Steven Englander and Nicholas Chia wrote in a memo that "the market appears to be underestimating the hawkish (tightening-preferred) outlook of the BOJ."
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, did not change her year-end forecast of 145 yen per dollar but expects it could fall to 139 yen by the end of next year.
However, some investment banks believe that despite the narrowing interest rate differential between the U.S. and Japan, the yen could continue to weaken. Shusuke Yamada, head of Japanese currency and interest rate strategy at Bank of America Japan branch, said, "I do not believe the yen will strengthen just because the Fed cuts rates," adding, "This is not a pattern seen in some previous rate-cutting cycles." BoA is among the investment banks forecasting a weak yen, expecting the yen-dollar rate to be between 150 and 155 yen per dollar by the end of this year.
The market is currently focused on the August nonfarm payroll report to be released on the 6th. If employment cools more than expected, there is analysis that dollar selling could intensify.
Some express concerns that if the yen's strength continues, it could introduce variables to the global asset markets similar to the global stock market crash triggered by the unwinding of the yen carry trade (borrowing low-interest yen to invest in asset markets) earlier last month. This raises worries about potential impacts on global asset markets.
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