The myriad of global risks this year is keeping yen bulls happy and encouraging bets on a world-beating rally in coming months.
The Japanese currency is predicted to outperform its Group-of-10 peers by the end of 2019 and gain nearly 3% to 105 per dollar, according to Bloomberg’s survey of currency analysts. With the bullish tone also reflected in the options market, Morgan Stanley and BNP Paribas SA expect tense geopolitics to drive it to a three-year high of 100 by early next year.
The currency is forecast to see the biggest advance into the end of 2019
“The global environment is in what we describe as an â€˜unstable equilibrium’ and we think this is going to cause volatility and a setback in risk assets,” said Hans Redeker, the global head of currency strategy at Morgan Stanley. “All that is going to lead to yen strength.”
The yen is only lagging the Canadian dollar in gains against the greenback this year, as growing trade conflicts drive investors into havens. While large Japanese bond redemptions in coming months could act as a transient drag on the currency, the Bank of Japan isn’t seen having the firepower to curb its ascent as global peers ease policy faster.
Morgan Stanley is among the most bullish, predicting the yen to rally 6% from current levels to end 2019 at 101 per dollar, while BNP Paribas predicts 102. Options traders are also betting on gains. Three-month dollar-yen risk reversals, a gauge of options sentiment and positioning, are at 180 basis points in favor of yen calls, more than average this year.
Allianz Global Investors’ Mike Riddell is one fund manager overweight the yen, which he sees as “an excellent portfolio diversifier.”
“The risk of a global recession in the next 12-18 months is greater than 50-50,” said Riddell, whose firm oversees 543 billion euros ($594 billion). “Within our funds, we think â€˜what is going to be your risk-off hedge’. This is where you really need to have some currencies -- things like the Japanese yen will have a very large rally in a crisis and or a global recession.”
The policy outlook at the Bank of Japan is another doubt, given the prospect that it could ramp up stimulus in October after standing pat this month. A strong yen could hamper the BOJ’s efforts to reach its inflation goal by pushing down prices for imports. Yen money markets are pricing a 10 basis points rate cut from the BOJ by the end of 2019, with a second cut by the end of 2020.
Ultimately domestic factors will be dwarfed by the global outlook, given the risk of a deterioration in the U.S.-China trade relationship and also between the U.S. and the European Union.
This would weigh on global risk sentiment, global equity markets, causing an appreciation in the yen.