The yen has been on a slippery slope against the dollar for the past six months due to policy divergence and surging commodity prices. Strategists say losses still have a long way to run.
Japan’s currency will weaken another 1% to 118.66 versus the greenback in the next few months as raw material prices rise, according to both Mitsubishi UFJ Morgan Stanley Securities Co. and Daiwa Securities Group Inc. Sony Financial Holdings Inc. sees it falling about 2% to 120 by year-end due to the dovish Bank of Japan.
Japan is a net importer of a long list of commodities from crude oil and grains to metals. Prices of all these have risen in recent weeks due to sanctions imposed on Russia over its invasion of Ukraine, and that means Japan will need to spend even more dollars to make its purchases.
“Japan relies on importing all these commodities, which are essential,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “As a fallout from the war in Ukraine, Japan is facing increased demand for dollars that’s irrelevant of risk sentiment.”
The yen is likely to drop to 118.66 per dollar in coming months, Ueno said. That would match a previous low set in December 2016.
Japan posted its sixth straight monthly trade deficit in January, with the shortfall climbing to an eight-year high of 2.2 trillion yen ($18.7 billion). It is due to report February numbers on Wednesday.
The yen declined to 117.55 per dollar in early Asian trading on Monday, the weakest level since January 2017, and heading for a sixth day of losses.
“Momentum for dollar-yen is clearly to the upside after failing to break below 114, and it can rise to 118.66 in the next one-or-two months,” said Yukio Ishizuki, a senior currency strategist at Daiwa Securities in Tokyo. “It’s difficult to see sanctions on Russia eased and commodities prices are likely to stay elevated, which puts yen at the mercy of ballooning trade deficits.”
The yen usually strengthens during episodes of risk aversion as speculators cut short positions built up during more positive period. This time round the dynamics are somewhat different.
Asset managers and leveraged funds have both trimmed net yen shorts, according to data from the Commodity Futures Trading Commission, but the currency has failed to benefit.
While the reduction in shorts may keep the yen in a range between 110 and 116 per dollar until the Ukraine situation stabilizes, the currency’s long-term direction is down and it will probably test around 120 by year-end, said Juntaro Morimoto, a currency analyst at Sony Financial in Tokyo.
“Divergence in monetary policy is putting upward pressure on the dollar-yen as a widening yield differentials will remove any yen appreciation factors after uncertainty over Ukraine clears up,” he said.
