Expect yen volatility with more weakness ahead

NEW YORK Mon Apr 22, 2013 5:08pm EDT

A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012. REUTERS/Kim Kyung-Hoon

A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012.

Credit: Reuters/Kim Kyung-Hoon

NEW YORK (Reuters) - The yen has mostly lost its luster given recent changes in Japanese monetary policy, and even volatility in the near term will not detract from the currency continuing to lose ground in months ahead, market analysts and money managers said on Monday.

Speaking at the Reuters FX Summit in New York, several market participants ranged from neutral at best to downright bearish on the Japanese unit.

"Japan's yen is no longer the safe-haven it used to be," said Axel Merk, president of Palo Alto, California-based Merk Investments, who oversees about $750 million in assets.

Earlier this month the Bank of Japan announced an aggressive plan to stimulate its economy, saying it will buy $1.4 trillion in bonds in less than two years. Bond buying, called quantitative easing (QE), is considered to be negative for a currency since it is tantamount to printing money and diluting its value.

Merk has been very short the yen since November. To be short a currency is a bet on its decline while the opposite holds true for holding a long position.

Vassilis Dagioglu, head of asset allocation portfolio management at Mellon Capital in San Francisco, which oversees $300 billion in assets, said he's been neutral on the yen since the fourth quarter of last year.

"But at this point, we're not willing to speculate about the particular level where the yen may reach. At this point, it's really very much politically decided," Dagioglu said.

He added the yen still exhibits a negative correlation with risk, strengthening when there are shocks in financial markets, as Japanese investors repatriate money back home. That may also limit the downside move of the currency.

And in the near term, worries about the global economy could even give the yen some strength, said John Taylor, chairman of FX Concepts in New York, one of the largest currency hedge funds.

"We're forecasting that the yen is going to be strong between now and July," Taylor said. "I think in the next quarter, we'll trade between 92 and 102, and I'd be more inclined to think 92."

The dollar rose to within striking distance of 100 yen on Monday, a level last breached in 2009, hurt by the BoJ plans to pump $1.4 trillion into its economy. It has risen around 14.3 percent this year.

But Taylor said few Japanese-based investors have been selling the yen in favor of higher-yielding assets abroad, likely because they are worried about taking on risk at a time when global growth looks fragile.

"The Japanese, from what I've seen, just don't buy this act yet," he said.

That will leave the yen weakening again in the second half, with the Japanese currency falling to 105 to 110 per dollar by year end.

The desire for a stronger path of growth helps explain why G20 and other officials, even those in emerging markets, have had no serious opposition to Japan's new plans to stimulate its economy by central bank bond-buying.

While the exasperation of finance ministers and central bankers attending last week's Group of 20 and International Monetary Fund meetings was palpable, economic growth is seen as key to ending the economic and financial crisis that has plagued the global economy since 2008.

Alessio De Longis, a portfolio manager at Oppenheimer Funds believes the weakening of the exchange rate through monetary policy easing will be successful.

Some 18 months ahead, De Longis sees the dollar trading in the 105 to 115 trading range.

"That is more like a fundamental projection, it's not a trading forecast, rather a trading-range forecast," said De Longis. Follow Reuters Summits on Twitter @Reuters_Summits

(Reporting By Nick Olivari, Wanfeng Zhou, Julie Haviv, Gertrude Chavez-Dreyfuss, Steven C. Johnson and Daniel Bases; Editing by Chris Reese)

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