Currencies | Nov 27 2012
– Case for weaker yen building
– Potential for short-term correction in USD/JPY
– Gold strong in yen terms
By Chris Shaw
The Japanese yen has depreciated over the past few weeks as the market prices in an increased probability of further central bank easing. This is expected in December in Danske Bank's view, when the Bank of Japan is forecast to increase its asset purchase program by an additional JPY 10 trillion.
On Danske Bank's numbers the depreciation in the yen means the US dollar/Japanese yen (USD/JPY) pair now has the largest misalignment and appears severely overbought at current levels. Investors are also net long the pair according to the latest IMM data.
Danske suggests there is a strong case building for a significantly weaker yen for a couple of reasons. The first is the likelihood of a further economic recession in Japan, while the bank also suggests the forthcoming general election in Japan has lifted speculation of an increase in the Bank of Japan's (BoJ) inflation target from the current 1% to a rate of 3%. Danske expects the BoJ will increase its asset purchase program by an additional JPY10 trillion at its next meeting on December 20.
In Danske's view, the introduction of a credible higher inflation target for Japan could prompt a structural shift in the underlying appreciation trend of the yen. Such a change would pave the way for a significant weakening in the yen.
Short-term Danske sees potential for a correction in the USD/JPY pair. Making a correction more likely is the fact the RSI index for the pair has reached levels above 70 and is currently at 79. This supports the view the USD/JPY is overbought at present, especially given the net long position of investors.
As a consequence, Danske suggests a significant weakening in the yen could be forthcoming over the next 6-12 months, so would look to buy the USD/JPY on any dips.
The recent fall in the yen, along with ongoing resilience in the gold price, has pushed the price of gold in yen terms towards a new high. For Deutsche Bank, this spread in fundamentals between the two is possibly more extreme than for any other major currency at present.
Gold is viewed as a non-fiat currency with sound supply characteristics and attractive store of value attributes, while Deutsche notes the yen is regarded as a currency with deteriorating fundamentals given the ongoing erosion of Japan's economic position.
The latter reflects the combination of ongoing deterioration in Japan's trade balance, adverse demographics and moves by the government to generate a minimum level of inflation. This has led to successive quantitative easing measures.
While the fact most of Japan's growing debt is owned domestically, Deutsche suggests the combination of a worsening trade balance and a retiring workforce could shift the balance towards a structural inflection point for the yen. If this was to occur, Deutsche suggests the yen/gold trade could continue to perform well.
Technical limitations
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