(Bloomberg) — The yen may strengthen to around 130 per dollar on the back of rising Japanese interest rates, according to BNP Paribas Asset Management.
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Once among the world’s hottest currencies to sell, the yen may advance 10 to 15% from current levels as the Bank of Japan hikes rates and the Federal Reserve resumes easing policy, according to James McAlevey, head of global aggregate and absolute return. Fears of an intensifying global trade war are also catapulting demand for havens — of which the yen will become an increasing beneficiary.
“The BOJ is tightening for good reason because inflation looks a bit more sustainable,” McAlevey said in an interview on Monday. The currency is now also “responding to ‘risk-off’ days in a way that it hasn’t previously.”
Traders have long viewed Japan’s currency as cheap after four straight years of losses, a victim of the nation’s yawning rate differential with the US. But even sophisticated investors have been wrongfooted time and again for buying the yen too early, underscoring just how fragile sentiment remains around the world’s third-most traded currency.
Japan’s once extreme rate gap with the US bludgeoned the yen to a multi-decade low of 161.95 per dollar in July before a gradual recovery to around the 150 levels this week. Hedge funds are also becoming less bearish, with net short positions on Japan’s currency now at the least since October, latest Commodity Futures Trading Commission data show.
McAlevey was among those who got in too early last year, and exited his bullish yen positions later in 2024 “when it wasn’t working.”
“We’re back in now,” said McAlevey, who has about a quarter century of investment experience. He began buying the yen again about a month ago. It’s been a profitable trade so far, given the yen has strengthened 1.6% against the dollar in the past month.
“The yen looks cheap and the dollar looks expensive, so you throw it together and you’ve got a pretty powerful recipe for dollar-yen,” he said.
Swaps pricing gives credence to McAlevey’s view of a narrowing US-Japan rate gap: traders see the Fed cutting another 75 basis points by year-end, and more than one quarter-point BOJ hike in the same period. Economic data backs the case too, with Tokyo prices holding above the BOJ’s target just as falling US consumer spending and manufacturing showed the US is edging closer to stagflation.