(Bloomberg) -- The strategist who defied Japan’s biggest investors to correctly predict the yen’s weakness in 2016 is forecasting more losses for the currency in the new year.
The yen is set to slump to 125 against the dollar in 2017, with little chance of a sustained gain past 115, as the Federal Reserve’s policy tightening widens the interest-rate differential between U.S. and Japan, said Mansoor Mohi-uddin, a strategist at NatWest Markets, a unit of Royal Bank of Scotland Group Plc. The forecast shows Mohi-uddin, who previously estimated a trading range of 110 to 120 for the yen versus the greenback, has turned more bearish.
“The Bank of Japan is the one major central bank set to keep monetary policy super-loose this year,” Singapore-based Mohi-uddin said in an interview Tuesday. “Dollar-yen is a popular trade already but shorting the yen is the purest play for a stronger dollar. The yen is likely to be the weakest major currency this year.”
A drop to 125 per dollar will take the yen to levels last seen in mid-2015. Japan’s currency has depreciated more than 9 percent since the U.S. election on Nov. 8, making it the worst performer among Group-of-10 peers. It reached a 10-month low of 118.66 on Dec. 15 and approached that level again last week. The currency slipped 0.1 percent to 115.93 as of 10:42 a.m. in Tokyo Wednesday.
The Japanese currency will be little changed at 116 at the end of the second quarter and at 115 by end-2017, according to median estimates in surveys conducted by Bloomberg. Hedge funds and other large speculators remain pessimistic on the yen, with net-short positions near the highest since August 2015, according to the Commodity Futures Trading Commission in Washington.
Read: Top Yen Analyst Says Dollar Drop Screams Buy for Gain Past 120
While “a blizzard of economic initiatives” from the U.S. may be announced over the next few weeks that could push the dollar to 120 yen, “the downside risks are obvious too and will eventually kick in, perhaps very soon,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank Ltd. in Singapore.
Berry warned that the currency pair will be vulnerable to heightened geopolitical tensions while a climate of rising Treasury yields had previously sparked crises in economies which have “over-indulged in credit.” A further rally in the dollar also risks blowing the Fed’s tightening schedule off course, thus capping Treasury yields and the U.S. currency, he added.
Minutes from the Fed’s policy meeting last month showed officials were shifting their focus toward the risk that an expansionary fiscal policy from Donald Trump’s administration may warrant a faster pace of tightening. The BOJ, on the contrary, will probably keep the 10-year yield around zero as November’s drop in consumer prices for a ninth straight month underscores the challenge policy makers face in stoking inflation, Mohi-uddin of NatWest said.
The strong December U.S. jobs and wage data bolsters the case for the Fed to raise rates three times in 2017, Mohi-uddin added.
“The Fed is likely to wait until June when the FOMC has more clarity on the new administration’s fiscal plans and Congressional approval,” Mohi-uddin said. “The markets, however, are likely to become more concerned about a March hike if the U.S. labor market keeps generating higher inflation now to the benefit of dollar-yen.”