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[19deTokio]- Based on the announcement of the dollar-yen market price observed after the beginning of autumn, the forecast range for next year has been revised.
In the past, the expected range until the end of 2021 was $ 1 = 102 yen to 112 yen, but I changed my judgment that it is safe to narrow it down to the 100-110 yen range. There are two reasons.
First, the chart looks bad after the daily shadow line that appeared on October 21. Before that, the price fell below 105 yen several times, but the drop to 104.00 yen in mid-September was accompanied by supply and demand speculation spurred by reports of foreign company sales by Japanese companies. There was a clear background of “US President’s crown infection” in the insert in the 104.90 yen range, which occurred for a moment earlier in the month.
The large shadow line observed on October 21 was different from those movements. Although I couldn’t find any background like this, I was surprised to see a sudden drop of more than 1 yen in light of the “dollar yuan drop” and the “rise of the British pound”. The dollar-yen often moves up and down in view of movements in other currency markets, but it rarely moves that much even though there is no material that directly affects the dollar-yen.
The large shadow line that suddenly appears in the so-called “material desert” time zone is disturbing because the background is not well understood and has great power to impress market participants with a bad feeling. In fact, since October 21, the frequency of seeing the level below 105 yen and the flight time increased by a stretch.
Second, despite such a situation, the government’s response was delayed. In the days of Shinzo Abe’s Cabinet, there were quick comments from the authorities that they were about to attempt the 105 yen breakout at the psychological milestone, but after the establishment of the current Cabinet, the policy management approach was to reduce the mobile charges and government offices. There were too many biases in the domestic arena, such as the abolition of Hanko and the personnel issues of the Japan Academy of Sciences, creating a blank area for the “strong yen alert.”
After the appearance of the large shadow line on October 21, the movement to seek the lowest price below 105 yen progressed, and after seeing the low range of 103 yen on November 6, Prime Minister Kan finally posted a comment on moderation, but it was timely. The impression is strong. It is too late to throw a control ball to first base after the first base runner decides to steal second base.
As a result, the level around 105 yen is no longer “iron plate support”. In the future, if something gains momentum, it is undeniable that there is a chance that the atmosphere of “I will not be satisfied unless I try 100 yen, which is a psychological milestone”, will strengthen, focusing on short-term sources that emphasize momentum. At the moment, it seems that the days of strong appreciation of the yen will continue.
However, when it comes to that area, the margin for lower prices is likely to be narrowed. Even for players who are not usually interested in buying and selling dollars and yen, there is probably no chance that the price will fall below 100 yen, which will stimulate an “absolute price”, and even if there is, it will not be inserted deeply. There are three reasons why I think so.
First, recently, the currency market theme selection has been too skewed towards the depreciation of the dollar. The depreciation of the dollar, which is based on America’s “twin deficit,” “historically low interest rates,” and the “expansion of central bank holdings,” has been popular these days, but the US’s twin deficit. America is currently the worst after the war and policy interest rates. It’s the lowest of all time, and the quantitative easing scale has outgrown the Lehman crisis, but the trade value-weighted-average dollar index has only slightly adjusted in the historical high range.
Needless to say, the subject of interest that moves the exchange rate changes like a cat’s eyes. If the history of the depreciation of the dollar is developed based on the above structural theory, the curse of the perpetual depreciation theory cannot be escaped, but the residents of the foreign exchange market are tired of it. It probably won’t keep moving in the same direction with the same material all the time.
Especially for the dollar-yen currency pair, if the end of this year is reached as it is, it will be the longest hidden line in history for the fifth year in a row. It is about time that the feeling of saturation was about to leave. It may be time to hit rock bottom next year.
At the time, the catalyst for the dollar-yen repulsion is unknown. However, looking at recent cases, the Taiyo Line, which appeared on November 9 and reached a maximum increase of 2.46 yen, was triggered by “expectations of the development of a new corona vaccine.” Considering the severe depreciation of the yen caused by the only report that “clinical trials were successful”, the reaction when the administration actually started may be more intense.
Second, official interest rates in both Japan and the United States have barely budged. Currently, the US Federal Reserve Board (FRB) is expected to continue its current policy of near-zero interest rates until at least the end of 2023, and there is no rate hike at the moment, so extreme dollar pressure is unlikely. On the other hand, however, there is no room for additional rate cuts unless the interest rate is negative. The turn towards the depreciation of the dollar is also likely to be limited.
On the other hand, the exit from monetary easing by the Bank of Japan has become less visible and it is highly unlikely that interest rates will rise before the United States. The US FRB currently combines the lowest political interest rate in history with asset purchases of $ 120 billion a month, and has been undergoing strong monetary easing since the time of the crisis of Lehman, but the yen dollar has not fallen to the 75 yen level as it was at the time. .. It is probably the effect of the easing of the Bank of Japan which is struggling at a level of more than 100 yen.
The unusual ultra-low interest rate policy of the Bank of Japan has side effects such as “pressure on the management of regional financial institutions” and “difficulty in managing institutional investors”, so there is almost no room for further reduction. The additional easing of the Bank of Japan has made it difficult for a depreciating impact of the yen to take place, but as long as domestic investors maintain the current policy of ultra-low interest rates, the backing power will be maintained to avoid an excessive appreciation of the yen. ..
Third, I would like to reiterate the statements I have made in this column, but the exchange rate supply and demand environment based on Japan’s basic equilibrium is generally balanced. Currently, the flow of real demand, which is the sum of Japan’s balance of commercial services, the balance of secondary income, capital transfer, etc., is almost in competition, and the excess of the balance of primary income obtained from interest and dividends abroad is transferred abroad. A loop has been created for direct investment and investment in long-term securities.
While the amount of surplus due to increased interest income on assets held abroad is stable, the momentum of cash flow out of foreign investment will move as the dollar-yen market level rises or falls. decrease. It becomes stronger or weaker in reverse proportion. If the dollar or yen strengthen extremely, it seems that the function of adjusting supply and demand is working that counteracts it and suppresses excessive exchange rate fluctuations.
Considering the above factors, we believe there is a high possibility that the price range will move up and down around 5 yen, focusing on 1 dollar = 105 yen over the next year. If it gets close to 110 yen, I’d like to sell it again, and if it softens to around 100 yen I’d like to consider buying a bargain, but if that’s the case, the range is too wide and there may be no chance of buy or sell. If you look closely, you can reduce the basic range to a few yen above and below 105 yen.
* This column was published in the Reuters Foreign Exchange Forum. It is written based on the personal opinion of the author.
* Daisaku Ueno is the chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities. He joined the Nomura Research Institute in 1988. After serving as Director of the International Finance Laboratory in 2000, he transferred to Nomura Securities in 2004, overseeing currency research as Director of the International Financial Research Division and Director of the Research Department of Investments in 2009. In July of the same year, he participated in the founding of the Foreign Exchange Dotcom Research Institute and since December he is Principal Investigator and President. He joined Mitsubishi UFJ Morgan Stanley Securities in April 2012 and has held his current position since April 2013. Since 2005, he has won first place in the exchange category for 5 consecutive years in the analyst ranking sponsored by Nihon Keizai Shimbun.
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