Saxo Bank’s Head of FX Strategy, John Hardy, explains why the Fed’s taper plans could see the Japanese yen reach a multi-year high against the greenback.
USD/JPY is close to its yearly peak of 103.73 and could push higher
The dollar was trading at six-month highs against the weaker yen on Tuesday (December 10th) as stronger risk appetite weighed on the Japanese currency.
USD/JPY is close to its yearly peak of 103.73 and could push higher as investors begin to take Fed taper talk seriously.
According to John Hardy, Head of FX Strategy at Saxo Bank, the carry trade “is on” and the pair is ready to deliver fresh highs.
He notes resurgent bond markets and improved risk appetite, a situation that makes the yen the favourite currency to sell.
“In a pro-carry trade environment, there is not going to be any currency weaker than the Japanese yen,” he says.
Investor confidence was bolstered after data last week showed that the US economy added more jobs than expected in November, driving the unemployment rate down to a five-year low of seven per cent.
This is fuelling expectations that the Fed will dial back stimulus in the near future, even if there is no immediate move to reduce bond purchases at the bank’s December policy meeting.
On Monday, St Louis Fed president James Bullard said labour market improvements boosted the chances of a Fed decision to taper asset purchases.
“A small taper might recognise labour market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,” he explained.
Fed tapering aside, even if the dollar is mixed there is a good chance it could move higher against the yen because of the Japanese currency’s weakness, according to Hardy.
Meanwhile Chinese data is also supporting riskier assets, heaping more pressure on the yen.
Figures released on Tuesday showed Chinese retail sales rose by a better-than-forecast 13.7 percent in November, while industrial production rose ten percent.