Diminishing prospects for further money printing by the US Federal Reserve just as the Bank of Japan looks ready to run more stimulus may weaken the yen to rates not seen in almost a year, a Reuters poll showed.
With official interest rates at near-zero levels for over three years, the Bank of Japan (BoJ) has had no other option but to hose the economy with extra cash to stimulate activity, nudge up inflation and weaken the yen.
The Reuters poll of 62 analysts taken between April 2-3, predicts dollar/yen to hover around where it is trading for the next 6 months between 82-83 per dollar before weakening further to 85 in 12 months, levels last seen in April 2011.
Forecasts were taken before minutes to the Fed's last policy meeting disappointed markets on Tuesday by hinting the central bank was not likely to go for another round of monetary stimulus as it felt the economy was showing signs of improvement.
"We've had a shift in the willingness of the part of BoJ and Ministry of Finance to act more aggressively in line with the quantitative easing in US and Europe to boost the economy and potentially weaken the yen," said Kit Juckes, head of foreign exchange strategy at Societe Generale.
While the BoJ is widely expected to refrain from easing policy in its next meeting on April 9-10, it is likely to act by the end of April when it issues new long-term economic forecasts.
These will almost certainly indicate that Japan is yet to show a sustainable recovery after it was struck by a devastating earthquake, tsunami and nuclear crisis in March last year and strengthen the case for further easing.
Another factor to effect dollar/yen levels were bond yields. Strong correlations between US Treasury yields and dollar/yen suggest US interest rates and Fed monetary policy will decide whether the dollar extends its move higher.
"Bond yields have now reached a low, that is I don't think yields will get any lower. Dollar/yen is bottoming out just like yields and we've probably seen the low for the next few years," said Juckes. The yen's sharp slide of almost 7 percent in February after the BoJ increased its stimulus programme by 10 billion yen, surprised analysts and traders alike. But it gave the central bank some respite in its constant battle to curb the currency's strength which was hurting the export-reliant economy.
While the yen hit a three-week high against the dollar on Tuesday, the overall trend of a weakening Japanese currency remains intact. Currency speculators boosted their bets in favour of the US dollar to most since January, according to data from the Commodity Futures Trading Commission (CFTC) released last week.
CFTC data shows that speculators have increased their short positions on the yen gradually throughout the month of March by almost 50 percent, from 52,761 in February 28 week to 78,527 in March 27 week. While the median consensus for dollar/yen stood at 85 in 12 months the range widened to the downside, when compared to last month's poll, from as strong as 70 to as weak as 95.
"The rally in dollar/yen we have seen over the course of February and early March was 90 percent explained by the rising global bond yields over the same period and we expect that to go into reverse," said Adam Cole, head of global FX strategy at RBC Capital Markets.
Cole's forecasts go against the general trend as he expects dollar/yen to strengthen to 80 in a month before moving to 76 in six and 70 in twelve months.
If the yen were to strengthen that much it would likely coerce the BoJ to top up its 65 trillion yen ($790 billion) asset-buying and loan programme. But Cole says the impact of such asset purchases in Japan were limited.
Annualised volatility in trading the Japanese yen is expected to fall this month to 8.4 percent compared with the actual 9.2 percent seen in March.
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