Yen bears stumble again as Fed, Trump spoil dollar’s rally

18/05/2017 07:34 AST

Yen bears may have become an endangered species. Again. A combination of US political risk, below consensus economic data, concerns on Federal Reserve hawkishness and drifting Treasury yields are putting pressure on the dollar. As a result, the Japanese currency may have seen its near-term lows and strengthen from here, according to traders and analysts.

“Concerns are growing that the Trump administration may face difficulties in executing his policies such as tax and healthcare reforms, resulting in pressure on the dollar,” said Yuji Saito, executive director at Credit Agricole CIB’s forex department in Tokyo. “The market is taking this as a political risk factor to buy the yen.”

Having rallied almost 3% against the yen in the month to Thursday, the dollar started to falter as US economic indicators including retail sales and inflation missed estimates. Housing starts were also below market expectations on Tuesday. The Japanese currency rose as much as 0.8% Wednesday to 112.26 per dollar.

Since falling from the year’s high of ¥118.60 in January, the dollar has stumbled each time it gets around the 115 mark, raising questions over the reflation trade bets by hedge funds, some of which had predicted a move toward 120-125 yen by the end of the year. The rebound in the Japanese currency could gain further momentum if investors consider the Fed to be under less pressure to pick up the pace of rate hikes should core inflation remain subdued.

“What many people are asking right now is how many more rate hikes are we going to see after June,” said Kumiko Ishikawa, forex analyst at Tokyo-headquartered Sony Financial Holdings. “It’s more likely that the Fed will raise rates only one more time after June, in line with their plan, so it’s difficult to become more bullish about the dollar against the yen.”

For the yen to fall, speculation needs to grow that the Fed will give a more hawkish assessment on outlook for interest rates at their next meeting, which is unlikely to happen, Ishikawa said.

Investors may also be wary ahead of the Fed’s meeting in June, remembering the yen failed to weaken against the greenback after their last interest rate hike in March.

“Investors had high hopes to see a strong dollar rally after the previous Fed’s rate hike, but that didn’t happen,” said Bart Wakabayashi, Tokyo branch manager of State Street Bank and Trust Company. “Many investors still remember that so are careful of taking large positions from here.” In addition, a decline in US Treasury yields has made traders less enthusiastic to buy dollars. “US Treasury yields may have to climb more convincingly for the dollar to chase beyond 115 yen,” said Koji Fukaya, chief executive at Tokyo-based FPG Securities. “Without that the dollar will be weighed down by geopolitical concerns and political issues in Europe.” The Japanese currency could rise to a range of 105 to ¥110 per dollar if there are more questions over the strength of the US economic recovery, he said. Still, it’s not all one-way traffic against the dollar. Others continue to highlight the wide interest rate gap between Japan and the US. This should help the greenback find support against the yen, they say. “Given the fact that the US is the only country which is actually raising interest rates and could start discussing specifics on cutting its asset holdings, the dollar/yen rate should be heading up in the long run,” according to Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities.

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