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Japan Scandal Gives Fresh Boost to Yen Bulls Eyeing 100 Mark

BOJ speculation, political pressure add to case for strong yen

Technicals suggest a break of 105 could lead to move past 100

A deepening political scandal that has rattled Japanese Prime Minister Shinzo Abe’s administration has become a fresh reason for yen bulls to spy a move past 100 per dollar.

The stars had already been aligning for the yen to potentially cross 100 for the first time since 2016, thanks to a combination of trade flows, investor positioning and monetary-policy divergence. Now Finance Minister Taro Aso has come under pressure thanks to a controversial land deal and currency traders are taking notice. “The theme for 2018 is the risk of the dollar-yen breaking 100,” said Masashi Murata, a currency strategist at Brown Brothers Harriman in Tokyo. The yen above that level “wouldn’t look excessive from the perspective of its fundamentals.”

The yen advanced to a 16-month high of 105.25 per dollar this month, before pulling back to around 106.30 Tuesday, and traders are now closely watching the key 105 level. Here are five reasons that suggest it may continue its ascent and push through 100, something not seen since August 2016.

BOJ Exit

The Bank of Japan has been reducing its monthly bond purchases, a part of its quantitative easing program which has been keeping yen strength in check. Its bond holdings increased by about 54 trillion yen in February from a year earlier, the slowest pace since July 2013 and well short of guidance of about 80 trillion yen. More reductions could lead to further yen appreciation.

Governor Haruhiko Kuroda made it clear last week the current stimulus program will remain in place for a while. There’s concern that any move past 100 could prompt a policy response if it’s deemed to hurt attempts to reflate the economy. However, his remarks on March 2 that the bank will start thinking about a stimulus exit in fiscal 2019 have at least increased market speculation over the timing of a possible normalization.

Kuroda’s mention of an exit was meant to prime markets for an eventual withdrawal, said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “Given the reduction in bond purchases, the BOJ is already laying ground for an exit. It just isn’t saying so.”

Current-Account Surplus

The increase in Japan’s current-account surplus is another factor exerting upward pressure on the yen. The currency has tended to follow the broadest measure of international trade with a 12-month lag. Government data showed Thursday the surplus was near a decade high in January.

Hedge Fund Positioning

Leveraged funds have been gradually cutting back bearish bets on Japan’s currency since Jan. 9, according to data compiled by the U.S. Commodity Futures Trading Commission. However, as the funds still hold net short positions, a further unwinding could lead to further yen gains. AMP Capital Investors Ltd.’s Nader Naeimi and Kit Trading Fund Ltd. said last month that they are betting on yen strength.

Technical Indicators

The dollar-yen exchange rate has been largely in a downward trend since the start of this year and approached a key support level of 105 on March 2. There are no major options expiries between the 105.00 and 100.00 levels for the remainder of this month, according to data from the Depository Trust & Clearing Corp. This indicates the rate is unlikely to find much support from options-defense strategies if the spot breaks below 105.

“There is no strong support below 105, so once the dollar-yen starts to fall, it would run fairly fast,” said BBH’s Murata. Finally, a scandal over alleged favors to a school for a property deal has shaken some voters’ confidence in the Abe administration. The affair probably won’t hurt the ruling Liberal Democratic Party’s grip on power after a resounding general election win last autumn. However, it could affect the likelihood Prime Minister Shinzo Abe, whose administration has endorsed a weak yen, will become Japan’s longest serving leader.

As Murata puts it -- “Yen weakness would come to an end once Abenomics is over.”

Investors are looking to American inflation and retail sales data followed by reports on Chinese industrial production, retail sales and fixed-asset investment to provide direction for markets this week. The U.S. inflation reading is the last major piece of data ahead of the Federal Reserve’s policy meeting next week.

Politics also remain in focus after President Donald Trump issued an executive order blocking Broadcom Ltd. from acquiring Qualcomm Inc., scuttling a $117 billion hostile takeover that had been subject of scrutiny over the deal’s threat to U.S. national security.

Elsewhere, crude oil slipped back below $62 a barrel. Industrial metals prices slumped.

Terminal users can read more in our markets blog.

Here are some of the key things happening this week

·         China data on industrial production, retail sales and fixed-asset investment all out on Wednesday are likely to point to slower growth, according to Bloomberg Economics forecasts.

·         Key indicators for the Fed dominate the economic agenda in the coming week. Headline inflation may have edged up to 2.2 percent in February from 2.1 percent, though consensus before Tuesday’s report is for core inflation to remain at 1.8 percent.

·         Prices and factory output are focal points in the euro area. Friday’s second inflation report for February may touch 1.2% from 1.1% the previous month.

·         Also this week, Germany’s Angela Merkel is inaugurated to a fourth term, EU27 government officials discuss the European Union’s Brexit position, and U.K. Chancellor of the Exchequer Philip Hammond issues his spring statement.

And these are the main moves in markets:

Stocks

·         Japan’s Topix index slid less than 0.1 percent as of 12:42 p.m. in Tokyo.

·         South Korea’s Kospi index was up 0.1 percent.

·         Australia’s S&P/ASX 200 Index declined 0.6 percent.

·         Hong Kong’s Hang Seng Index fell 0.2 percent and the Shanghai Composite Index lost 0.2 percent.

·         S&P 500 Index futures were flat. The underlying measure lost 0.1 percent.

Currencies

·         The Bloomberg Dollar Spot Index held on to Monday’s 0.3 percent drop.

·         The yen fell 0.1 percent at 106.49 per dollar.

·         The euro was flat at $1.2335.

·         The pound was steady at $1.3901.

Bonds

·         The yield on 10-year Treasuries held at 2.87 percent.

·         Australia’s 10-year yield was steady at 2.81 percent.

Commodities

·         West Texas Intermediate crude held onto losses after decreasing 1.1 percent, to trade at $61.23 a barrel.

·         Gold rose 0.1 percent to $1,321.32 an ounce.

 

Source: Bloomberg, Masaki Kondo & David Finnerty — With assistance by Andy Sharp, and Patricia Lui