Yen Set to Inflict More Pain on Investors’ Bullish Convictions

(Bloomberg) — Things may get even worse for Japanese currency bulls after the yen touched its lowest level against the greenback this year and traders get closer to erasing their bets on a central bank policy tweak.

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The yen closed at 137.98 per US dollar on Friday and has weakened over 5% this year. The Japanese currency’s breach of its December support has paved the way to 140, and potentially to its late-November low of 142.25.

Many investors, including National Australia Bank, expected the yen to rebound this year, after tumbling over 12% in 2022, amid expectations the Bank of Japan would change its ultra-loose monetary policy to tame rising inflation. While the BOJ had called for a long-term review, new Governor Kazuo Ueda seems content to keep its yield curve control policy intact, at least for now.

“With the BOJ governor signaling a more patient approach to tweaking the YCC threshold, risks are stacked against the yen,” Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon in Singapore, said. “We think dollar-yen could go to 140 by the end of the second quarter if the central bank stands pat despite rising wages and elevated inflation rates.”

Governor Ueda’s rhetoric has helped reduce market expectations. Japanese 10-year swap rates – which indicate where long-term yields lie – have fallen from a peak of 1% in January, hovering near the upper 0.5% boundary of the central bank’s 10-year bond yield target range. Meanwhile, dollar-yen option pricing for the next month, which covers the next central bank meeting, is trading well below this year’s high.

Also grinding the currency pair higher is hawkish Federal Reserve sentiment that widens the interest rate spread between the two nations. Investors will look to the more timelier Tokyo May CPI data this week, after national figures on Friday showed Japan’s prices re-accelerated in April after cooling earlier in the year. If inflation remains sticky, this may spur a change in the BOJ’s YCC stance.

“Dollar-yen will drift higher over the next few weeks as broad dollar strength returns to the market on the back of slowing global growth,” says Ashvin Murthy, chief investment officer at AVM Capital Pte. in Singapore. Murthy sees the yen rising possibly above 140 by the end of the second quarter if the BOJ doesn’t abandon yield-curve control in June.

Here are the key Asian economic data due this week:

  • Monday, May 22: China 1- and 5-year loan prime rates, Japan core machine orders, South Korea 20-day exports/imports, Taiwan export orders, Thailand economic survey

  • Tuesday, May 23: Japan PMI’s, Singapore CPI, Indonesia BoP 1Q current account balance, Taiwan industrial production, South Korea consumer confidence

  • Wednesday, May 24: RBNZ interest rate decision and monetary policy statement, RBA’s Jacobs speaks, South Korea business surveys, New Zealand 1Q retail sales ex-inflation

  • Thursday, May 25: Bank of Korea interest rate decision, Bank Indonesia rate decision, Singapore quarterly GDP

  • Friday, May 26: Australia retail sales, New Zealand consumer confidence, Tokyo CPI, Singapore industrial production, Malaysia CPI

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