Yen to ease gradually as risk aversion subsides

The Japanese yen is seen weakening against the dollar over the next twelve months, but at a slower pace than was expected in the last Reuters poll, as the European debt crisis keeps investors away from risky assets. The monthly survey of 61 strategists, taken July 2-7, saw the dollar at 89 yen in a month from now, 95 in six months and 98 in a year, compared with 92, 95.7 and 100 last month.
This is the first time since December that the median one-month forecast for dollar/yen has slipped below 90. Thirty-eight of 56 analysts saw the yen fall below 90 in a month compared with a meagre four of 56 in the June poll. The yen is currently trading around 87 to the dollar.
It rose to a high of 86.94 last week, its strongest since December. But only a handful of strategists think the yen will test the 14-year high of 84.8 per dollar it hit in November last year. They include Ashraf Laidi at CMC Markets, who sees the dollar at 84 yen in three months.
"The combination of emerging risk aversion and red flags for US growth would appropriately be reflected in a rising yen and a falling US dollar," Laidi said. Only eight of 61 strategists expect dollar/yen to trade at or below 85 over the next twelve months.
The outlook for the yen has become less uncertain than in the last survey as a range of forecasts for all time horizons narrowed in the latest poll. For the 12-month horizon alone the range narrowed to 82-110 yen from 70-115. The European debt crisis and fears of contagion have made nervous investors rush to unwind leveraged carry trades on the back of significant deterioration in risk appetite.
Still, analysts expect the trend to reverse as the global economic recovery - which has been looking rather rickety lately - gathers pace and prompts investors to borrow money in the low-yielding Japanese currency to fund trades outside Japan. Further appreciation of the yen might also prompt the Bank of Japan to intervene directly in currency markets to cap the yen and aid its export oriented economy, strategists said.