Yen’s 1% Rally on Abe Resignation Risks Running out of Juice

(Bloomberg) -- The Japanese yen’s rally on news of Prime Minister Shinzo Abe’s planned resignation isn’t necessarily an indicator of what’s to come.

The haven currency jumped as much as 1.2% on Friday, helped by a domestic rush for safety sparked by political uncertainty. Yet the U.S. dollar’s fate is more likely to determine the yen’s future because Abe’s successor is unlikely to mean radically tighter fiscal and monetary policy, traders and analysts in Europe say.

Japanese investors and companies repatriated funds from overseas ahead of Abe’s announcement, according to two traders in Europe. As the prime minister confirmed the news, momentum-driven traders also went long on the yen as month-end flows weighed on the dollar, they said.

This is a common knee-jerk reaction to a risk that may eventually fade, especially should yen volatility fail to sustain its advance when the market closes on Friday, according to the traders, who asked not to be identified because they are not authorized to speak publicly. That could mean it’s the dollar that determines whether the yen can reach the 100 handle against the U.S. currency.

“Abe’s resignation also means the end of his aggressive and ambitious economic policy, Abenomics,” said Thu Lan Nguyen, foreign-exchange Strategist at Commerzbank AG in Frankfurt. Yet “there is unlikely to be a major change -- especially in the direction of a much more restrictive policy.”

One-week implied volatility in dollar-yen rose by 259 basis points on Friday, the most in a month, to trade at 8.64%, a four-week high. Should the gauge retreat soon, that would mean spot price action may also enter tighter ranges.

The yen has made the smallest gains in the Group-of-10 currencies in the past three months, as heightened haven demand meant investors looked elsewhere for yield.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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