January 16, 2014 / 9:01 PM / 4 years ago

Investors brace for weaker yen against kiwi, real

* South Korea could act to slow won’s rise against yen

* Not much upside seen for Aussie dollar-yen

* Brazilian real “uridashi” bonds could grease yen’s slide

By Lisa Twaronite

TOKYO, Jan 17 (Reuters) - The yen has more room to fall against many widely traded currencies in the months ahead under the weight of the Bank of Japan’s ultra easy monetary policy, though its downward progress will be uneven as the policies of rival central banks diverge.

A clutch of rival currencies have benefited from the dollar’s surge against the yen over the past year, prompting trading partners such as China and South Korea to publicly express fears that their exports might be casualties of Japanese Prime Minister Shinzo Abe’s “Abenomics” policies aimed at sparking growth and vanquishing persistent deflation.

Analysts say the Japanese currency could bump to new multi-year lows in 2014 against New Zealand’s dollar and face downward pressure against Brazil’s real as those countries’ central banks hike interest rates.

Its losses against the Australian dollar and South Korea’s won may be more limited, with the central bank in Sydney in no rush to tighten in the face of a sluggish economy and traders wary of market intervention by Seoul to cap its currency.

The Bank of Japan (BOJ) is committed to maintaining its ultra-loose policy as it aims for a target of 2 percent inflation within 2 years, while seeking to cushion any blow to the economy from a hike in the country’s sale tax in April.

Against this monetary backdrop, market participants say a weaker yen should catch no one off guard.

“Derivatives-wise, I do think people are positioned properly for a weaker yen, whether it would be in options or just a flat-out long dollar-yen or cross-yen position,” said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.

“There’s been a lot of attention on dollar-yen, but if you look at the crosses, like euro-yen, sterling-yen, there are positions there, too.”


The dollar surged more than 21 percent against the yen in 2013, its biggest yearly percentage gain against the Japanese currency since 1979, according to Thomson Reuters data.

The yen’s weakness has been a consequence of the BOJ’s massive burst of money-printing - almost $70 billion a month - under which it buys the equivalent of 70 percent of new Japanese government bond (JGB) issuance.

With the U.S. Federal Reserve starting to taper its own monetary stimulus, yield differentials will likely continue to favour the dollar - and by extension other currencies, or “crosses” - over the yen.

The Japanese currency will likely face some scattered rebounds on profit-taking, as it did earlier this week.

And a contrarian view argues the yen could gain in 2014, as the tax hike drags on growth and the BOJ exhausts its asset-purchasing arsenal, pushing up JGB yields and stemming fund outflows from Japanese investors seeking higher yields abroad.

Still, a solid majority of foreign exchange strategists in Reuters’ latest monthly poll said the yen would be among the worst-performing developed world currencies in the first six months of 2014, with the consensus calling for the yen to trade at 104 per dollar in one month, 106 in six and 110 in a year.

Speculators’ net yen short positions - bets against the yen - stood at 128,868 contracts as of Jan. 7, edging down for the second straight week but still close to a 6-year high.

“A lot of this yen-short positioning is done by hedge funds who put these positions on, but there’s a lot of scope for some more real money flows, with a lot of domestic outflows that still have to take place in Japan,” said Mitul Kotecha, global head of FX strategy at Credit Agricole in Hong Kong.


Credit Agricole forecasts the yen will fall to 8.87 South Korean won by the end of 2015, down from a 5-year low below 10 touched earlier this month.

“We still expect it [the won] to go higher, but there’s a risk of potential intervention to stop that move in the won/yen cross, so I think markets are a bit wary,” Kotecha said.

A slowdown in the yen’s decline against the won would offer some relief to Korean car makers such as Hyundai Motor Co , who have been struggling to maintain competitive pricing against Japanese rivals.

The Australian dollar is unlikely to rally much against the yen in the face of a Reserve Bank of Australia campaign to “talk down” the currency. The RBA is also seen keeping rates steady at a record low of 2.5 percent for now.

Indeed, the Aussie/yen plunged more than 1 percent on Thursday to a near 1-month low of 92.13 yen, dragged down by the Aussie’s skid to a more than 3-year low against the U.S. dollar after dismal Australian employment data revived speculation that interest rates could go even lower.

The New Zealand dollar, however, is trading above 87 yen, close to a 6-year high, as the Reserve Bank of New Zealand flashes hawkish signals.

That could help revive the kiwi’s appeal for the so-called carry trade, a popular strategy before the global finiancial crisis in which investors borrowed low-yielding yen to buy assets in higher-yielding currencies.

The kiwi, as well as Brazil’s real, could also get some help from foreign-currency bonds, called uridashi, sold to yield-hungry Japanese retail investors.

Real-denominated gross uridashi issuance represented more than half of the total in November, and reached its highest level since July 2010, according to Barclays analysts.

Brazil surprised economists on Wednesday by raising its benchmark interest rate to 10.5 percent - a 2-year high- to tame of surging inflation. (Additional reporting by Dominic Lau and Hideyuki Sano in Tokyo, Ian Chua and John Noonan in Sydney, and Masayuki Kitano in Singapore; Editing by Alex Richardson)

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