Background
The yen this month has rallied from an eight-month low against the dollar, strengthening through the psychologically important 140 level by mid-July. Short sellers may have maxed out after record bets against the yen in futures markets over the past six months. Options auger well for strength, while the analyst consensus is bullish. The yen could remain strong throughout the summer despite the season typically being a weak period.
The issue
The yen declined by 8% against the dollar during the second quarter of 2023, reaching its lowest level since November 2022. This retreat followed a December decision by the Bank of Japan to raise its bond-yield cap, which sparked the yen to under 130 in the near term.
Some analysts predict continuing strength, with Capital Economics marking a year-end target of 130 and Dominic Schnider of UBS Global Wealth Management predicting 128. “Having long-yen exposure also acts as a risk-off hedge in a portfolio context should renewed financial market stress emerge,” Schnier says.
The yen’s advance could also spark shorts, with economist Eisuke Sakakibara predicting the yen could fall to 160 and beyond — levels that haven’t been seen since 1990.
Hedge funds and leverage funds boosted yen net shorts anew since early June, based on Commodity Futures Trading Commission data. The U.S. dollar has dropped against multiple major currencies of late, including the yen, as traders consider the impact of cooling inflation on the Federal Reserve’s most-aggressive tightening cycle in a generation.
The BOJ, meanwhile, may respond to strong inflation and renewed weakness in the yen by adjusting its yield-curve control program later this year, according to Lombard Odier.
Tracking
Run USDJPY Curncy SEAG <GO> for Seasonality Analysis on USDJPY.
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