No one-way bet on yen, HSBC says

April 16, 2013

Will the yen continue to weaken?

Most people think so — analysts polled by Reuters this month predict that the Japanese currency will fall 18 percent against the dollar this year. That will bring the currency to around 102 per dollar from current levels of 98. And all sorts of trades, from emerging debt to euro zone periphery stocks, are banking on a world of weak yen.

Now here is a contrary view. David Bloom, HSBC’s head of global FX strategy, thinks one-way bets on the yen could prove dangerous. Here are some of the points he makes in his note today:

—  Bloom says the link between currencies and QE (quantitative easing) is not straightforward. Note that after three rounds of QE the dollar is flexing its muscles. The ECB’s LTRO too ultimately benefited the euro.

—  The BOJ surprised investors with the scale of its bond buying plan relative to the size of its economy. But Bloom says the Fed has actually tripled its monetary base since 2008 while the Bank of England has expanded it fivefold. The BOJ on the other hand plans to double it over the next two years.

— Bloom calculates that the BOJ plan relative to Japan’s monetary base justifies a yen/dollar depreciation of 15 percent. Instead the currency has fallen almost 30 percent since October.  The yen would have merely moved to 88 per dollar from a November level of around 80, had the market known the BoJ planned to double its monetary base, he says, adding:

So the Bank of Japan’s actions have not been as awe-inspiring as some claim, and may very well be priced in.

And even if the yen does weaken further, Bloom says the benefits to Japan will be somewhat negated as other countries, especially neighbours in Asia, also try to dampen their own currencies. He says:

The currency war has just been raised another notch, and the yen will not have a free ride.

And what of the implications for global markets? The reckoning is that the prospect of further yen weakness will be the catalyst to push trillions of dollars currently locked up with Japanese households,  mutual funds and insurers out into the world to seek yield. This too should not be taken as a given, Bloom warns. He reminds clients of 2000, when markets anticipated a wave of money flowing out of Japanese Postal Savings accounts into overseas assets as time deposits matured. That did not eventually happen. Nor did the yen weaken much.


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