A Yen Revival Is on Its Way After the Quietest Year in Five Decades

(Bloomberg) -- Traders hoping for more volatility in the yen next year are likely to be disappointed. But bulls can take solace in the currency’s upward bias amid a narrowing in the interest-rate differential between the U.S. and Japan.

That’s the view of analysts in Tokyo, who expect trading versus the dollar to be confined to a 10-yen range in 2020, with the topside capped at about 101. The pair traded at 109.38 as of 8:37 a.m. in London on Friday.

The yen has swung in a range of less than 8 per dollar since January, the least for any year in data going back five decades. With the outlook for global trade improving following a partial deal between the U.S. and China, a key gauge of volatility in dollar-yen sank to a record this week.

“Strength in both the yen and the dollar has made the pair immobile, but next year may see a bit more life, with a shift in the balance between the two,” said Minori Uchida, head of global market research at MUFG Bank Ltd. in Tokyo. He sees the yen strengthening slowly but steadily each quarter in 2020 and ending the year at 104 per dollar.

Fiscal stimulus from Prime Minister Shinzo Abe’s government takes some of the pressure off the Bank of Japan to ease monetary policy further next year. Meanwhile, there remains speculation that the Federal Reserve will cut U.S. interest rates, despite upbeat comments from Chairman Jerome Powell.

‘Firmer Yen’

“The bias is more for a firmer yen,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “The risk isn’t for a higher dollar because U.S. yields are likely to fall on doubts over the sustainability of the country’s 10-year expansion.”

Karakama predicts dollar-yen will stay in a 101 to 111 range over the next 12 months and close out 2020 at 103.

The BOJ would need to end its negative-interest-rate policy to provide a catalyst strong enough for the yen to break out of its range, he said. While such a move isn’t expected any time soon, investors will be watching to see if the Swedish central bank’s decision this week to end half a decade of subzero borrowing costs heralds the beginning of a global shift.

If history is any any guide, short selling of the dollar may get the yen off to a strong start to the year next month. Traders who have bet on dollar losses versus the yen in January have posted gains in eight of the past 11 years, according to Karl Steiner at Swedish bank SEB AB.

The BOJ may tweak its framework in 2020 to make it more sustainable but there are unlikely to be major changes, and the central bank will be on guard to curb any excessive drop in yields, according to Tohru Sasaki, head of Japan markets research at JPMorgan Chase Bank in Tokyo.

While fair value for the pair’s real-effective-exchange rate is about 90 yen, continued Japanese outbound M&A and foreign investment will keep its advance well short of this level, Sasaki said.

He sees dollar-yen largely confined to a range of 107-112 before ending 2020 at 110.

Core range

Osamu Takashima, chief foreign-exchange strategist at Citigroup Global Markets Japan Inc., expects a core range of 105-110.

It would take a clear turn for the worse in U.S.-China trade relations and heightened political risk from the U.S. presidential election to prompt enough of a flight to safety to see dollar-yen test 100, he said.

This leaves the majority view from analysts in Tokyo for a modest appreciation in the yen next year, on top of what is a slim gain so far in 2019 of 0.3%.

--With assistance from Masaki Kondo and Michael G. Wilson.

To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net;Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net

©2019 Bloomberg L.P.