May 25, 2022

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– Weakness Seems Unstoppable – E24

And, according to Bloomberg, the belief that the stressed Japanese currency will weaken further against the dollar is on the rise.

Yen Weakness: There is currently encouragement among short yen shorts.
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The Japanese yen has weakened significantly in recent months and is now at historically weak levels against the dollar.

The yen’s weakness against the dollar appears unstoppable, says chief strategist Shinsuke Kajita at Tokyo-based bank Resona Holdings. Bloomberg.

In March, the yen was around 115 yen to the dollar, while on Thursday it was 128.1, and Bloomberg writes that more are expected to weaken further to $130 in the coming months.

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Focuses on more weakness

Bloomberg confirms that a number of financial market players have focused on weakening the yen through short selling, a practice where profits are made.

The amount of bets being made by asset managers is now a record, according to the news and analysis agency.

Bloomberg explains the development with investors saying the Bank of Japan will defend the weak currency, it seems.

“It’s hard to see that it won’t get to $130 given the current sentiment,” Kajeta told Bloomberg.

US Bank of Wells Fargo also expects the yen to weaken further.

“We definitely think the price per dollar is above 130,” Wells Fargo Securities’ Currency Analyst Brenda McKenna tells CNBC.

Assuming the BoJ sticks to its current policy, we believe the yen could move above 135 per dollar, and that could happen in the near future, he continues.

Interest rate differentials and war

Magne Østnor, strategist at DNB Markets, explains the weakness of the yen as follows:

– The most important driver in the market is the difference in interest rates for the dollar and the yen, but we see that the immediate effect of the war in Ukraine leads to the strengthening of the dollar in general, given the use of the US dollar as a safe. Haven, says Austenor.

The interest rate on a ten-year US government bond loan is now close to three percent, while the Japanese interest rate is close to 0.25 percent.

Ostenor notes that as the US Federal Reserve rapidly starts raising interest rates after the Corona crisis, the Bank of Japan has gone in the opposite direction and is still slowing the rise in long-term government interest rates.

Japan’s interest rate hike isn’t expected until 2023, while the Federal Reserve has announced sharp rate hikes ahead.

It may be more attractive for foreign players to invest in countries with high interest rates, because the return will be relatively higher than other countries. When foreign capital applies to the country, the demand will increase and the currency will strengthen.