Yen Pre-Trump High Looms on Geopolitics, Reflation Unwind

(Bloomberg) -- Marine Le Pen may be about to undo the Donald Trump effect, at least when it comes to the yen.

The currency is advancing toward 105 per dollar, a level last seen just after U.S. voters unexpectedly elected Trump in November. One-month risk reversals show traders are about the most bullish on the yen since June, while speculators have resumed bets the Japanese currency will strengthen.

Long seen as a haven because of Japan’s current-account surplus, the yen has been bolstered this year by geopolitical tensions from lingering Brexit concerns and anxieties that the Le Pen will pull off another populist shock, to Trump’s attack on Syria and his confrontations with North Korea. Risk events in coming days include the first round of the French election on Sunday and the 85th anniversary of the foundation of North Korea’s military on Tuesday.

Yen Pre-Trump High Looms on Geopolitics, Reflation Unwind

“The yen is likely to rise further in the next few days ahead of Sunday’s French election and towards April 25 with the potential that North Korea conducts a nuclear test or declines to heed China’s diplomatic efforts,” said Jun Kato, a senior fund manager at Shinkin Asset Management Co. in Tokyo. “It wouldn’t be surprising to see the yen hit 105 as fading expectations for Trump spur markets to realize they were too aggressive in buying dollars.”

The yen climbed to a five-month high of 108.13 per dollar on Monday following Trump’s comment that the dollar was getting too strong and after an unexpectedly-poor U.S. inflation report. Implied volatility in the dollar-yen currency pair jumped to a three-month high the same day. The currency was at 109.24 as of 2:30 p.m. in Tokyo on Friday.

One-month risk reversals showed traders are growing increasingly bullish on Japan’s currency, with the cost to protect against yen gains relative to that insuring against declines climbing to the highest since June. At the same time, three-month risk reversals show traders remain skeptical the current gains will last.

Yen Pre-Trump High Looms on Geopolitics, Reflation Unwind

“North Korea is the primary factor near-term that is putting pressure on the yen to rise,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “What markets detest the most is a situation with no end in sight. A prolonged period of uncertainty inevitably weighs on psychology. If tension heightens further in the near term, the yen could rise towards 106.”

Surge Possible

Ueno said military action may spur a massive surge in the yen, citing its jump of around 4 percent on Jan. 17, 1991, the day the U.S. began its aerial bombing campaign against Iraq. That would mean a 4-to-5-yen move higher is possible from current levels, he said, adding that markets may test two key resistance points based on dollar-yen highs from last year -- the level of 107.50 set on July 21 and 105.50 reached on Oct. 28.

France will hold the first round of its presidential election on Sunday, with polls showing a tight race between four candidates. The National Front’s Le Pen has threatened to take the country out of the EU, while leftist Jean-Luc Melenchon wants to renegotiate the bloc’s treaties, including the one that keeps the country in the euro. Polls showed former economy minister Emmanuel Macron would defeat any of his rivals in the May 7 runoff, as long as he can get there.

“Dollar-yen is top-heavy ahead of the French election,” said Yuji Kameoka, chief foreign-exchange analyst at Daiwa Securities Co. in Tokyo “If centrists lose in the first round of the vote, the yen could gain beyond 107, with 105 levels coming in sight. The upside risk through the first week of May is around 105, but yen appreciation pressure may stay if sentiment remains cautious about risk.”