Paul Lambert
Currency fund manager at Insight, part of BNY Mellon
The yen dollar pair could go much higher than 110
Publié le 21 Mai 2013
What is your view about the forex market today?
There has been a very strong trend in the yen for a few months now. The market anticipated the change in the monetary regime in Japan. This change was then unveiled by the new governor of the Bank of Japan.
There are some other developing trends in the forex markets which have been impacted by falling commodities prices. Some currencies of countries exposed to commodities have weakened, particularly the Australian and New Zealand dollars and the South African rand.
We are seeing also a slightly stronger US dollar. That reflects the relative strength of the US economy and the increasing likelihood that the era ultra-loose policy may be coming to a close.
You expect that the strength of the US dollar will go on...
Absolutely, that is what we expect. The currency was undervalued. Since the financial crisis, the Federal Reserve has been more effective than other central banks in both aggressively easing policy and restoring economic growth. Further, the relative progress of the US economy means the Fed won’t be able to ease as much in the future as other central banks, particularly as the BoJ, which is pumping more money into a smaller economy.
The dollar has the potential to break out of his recent ranges and to appreciate against other major currencies.
Weakness in the yen will continue until the BoJ achieve its inflation target.
Which yen dollar rate do you expect?
I think the yen dollar pair could go much higher than 105 or 110. It depends on your time frame. It could go up to 105 by the end of the summer and to 110 by the end of the year. Then the rate could even go higher.
For some experts the market anticipation of the inflation level, near 2%, in other words near the BoJ’s target, could limit the depreciation of the yen against the dollar?
We should not forget that inflation is the change in prices rather than the level of prices. If the BOJ stop easing policy once they reach their inflation target, and the yen stabilizes then the price level could stay the same and inflation would fall back towards zero. The BoJ need to keep the currency moving while encouraging growth to become more dynamic.
A good point of reference is to look at what happened with the dollar yen pair in 1995-1998. This was also a period when Japan decided to embark on more aggressive monetary easing. It was the first time the central Bank introduced something which looks like quantitative easing. The pair started in 1995 around 80. It reached in 1998, 150. There is a precedent for significant yen depreciation.
Could there be a backlash against Japan’s strategy?
If we look at the industrial production growth in Japan relative to the industrial production growth in Korea, Japan’s industry has been in a relatively bad shape for the last 15 to 20 years.
Japan share in the world’s trade in 1990 was 14%. Now it is 5%. Japan competitiveness has a smaller impact in the world now because of its smaller share of world trade.
The economy of Japan has been weak for a long time and is currently growing very slowly.
For these reasons I don’t any backlash against Japan’s strategy.
You have more conviction of a stronger dollar against the yen than a stronger dollar against the euro…
The euro is a fundamentally strong currency. It is a problem for Europe. I would compare the euro to what the yen used to be.
The euro area has a current account surplus. The ECB appears to be reluctant to be as easy as other central Banks. The inflation target in Europe is the core policy target for the ECB. Other central banks are far less committed now to inflation targeting. The combination of current account surplus and an hard money, inflation targeting central bank, will mean that the euro will remain relatively strong even if it could weaken a little bit against the dollar.
However, I don’t have a position regarding the euro dollar pair because it is very complicated. There are numerous factors leading to either an increase or a decrease. So I don’t have a target. A lot of forecasts were established for the end of the year and those levels have already been reached in the last few months.
What about the impact of the BoE on the sterling?
The impact has been relatively small the last six months. It seems as though (retiring) governor Mervyn King has wanted looser policy, but he was outvoted by the other members on the Monetary Policy Committee. The BoE has ended up doing nothing. Obviously, from July, monetary policy will be influenced by the arrival of the new governor, Mark Carney. However, right now, we don’t know exactly what he will do.
The UK economy has to continue with the slow process of deleveraging. This means policy is likely to stay easy. As for sterling, it is likely to see selling pressure and remain vulnerable. However, it is difficult to have a strong conviction on sterling before Carney shows his hand.
What is your opinion on a new policy target aimed at growth?
One of the problems in UK is that we don’t forecast GDP very well. We look at the last GDP release, there were a lot of revisions, especially because of the employment component.
You have negative position in Australia and the New Zealand dollars?
The Australian dollar is mostly governed by the deteriorating fundamentals, the overvaluation, the peak in the mining boom and the falling of commodities prices that Australia exports. This decline is related to increase of supply of commodities following the investment bull and the structure of the growth in China. We think commodities prices will remain soft.
In the case of New Zealand, fundamentals are not deteriorating as quickly. Support from domestic demand and from high rate is stronger. We are worried by the fact that the market has a much bigger long positions in New Zealand dollar. The market could anticipate an exit of these positions. So we could have a correction.
There has been a very strong trend in the yen for a few months now. The market anticipated the change in the monetary regime in Japan. This change was then unveiled by the new governor of the Bank of Japan.
There are some other developing trends in the forex markets which have been impacted by falling commodities prices. Some currencies of countries exposed to commodities have weakened, particularly the Australian and New Zealand dollars and the South African rand.
We are seeing also a slightly stronger US dollar. That reflects the relative strength of the US economy and the increasing likelihood that the era ultra-loose policy may be coming to a close.
You expect that the strength of the US dollar will go on...
Absolutely, that is what we expect. The currency was undervalued. Since the financial crisis, the Federal Reserve has been more effective than other central banks in both aggressively easing policy and restoring economic growth. Further, the relative progress of the US economy means the Fed won’t be able to ease as much in the future as other central banks, particularly as the BoJ, which is pumping more money into a smaller economy.
The dollar has the potential to break out of his recent ranges and to appreciate against other major currencies.
Weakness in the yen will continue until the BoJ achieve its inflation target.
Which yen dollar rate do you expect?
I think the yen dollar pair could go much higher than 105 or 110. It depends on your time frame. It could go up to 105 by the end of the summer and to 110 by the end of the year. Then the rate could even go higher.
For some experts the market anticipation of the inflation level, near 2%, in other words near the BoJ’s target, could limit the depreciation of the yen against the dollar?
We should not forget that inflation is the change in prices rather than the level of prices. If the BOJ stop easing policy once they reach their inflation target, and the yen stabilizes then the price level could stay the same and inflation would fall back towards zero. The BoJ need to keep the currency moving while encouraging growth to become more dynamic.
A good point of reference is to look at what happened with the dollar yen pair in 1995-1998. This was also a period when Japan decided to embark on more aggressive monetary easing. It was the first time the central Bank introduced something which looks like quantitative easing. The pair started in 1995 around 80. It reached in 1998, 150. There is a precedent for significant yen depreciation.
Could there be a backlash against Japan’s strategy?
If we look at the industrial production growth in Japan relative to the industrial production growth in Korea, Japan’s industry has been in a relatively bad shape for the last 15 to 20 years.
Japan share in the world’s trade in 1990 was 14%. Now it is 5%. Japan competitiveness has a smaller impact in the world now because of its smaller share of world trade.
The economy of Japan has been weak for a long time and is currently growing very slowly.
For these reasons I don’t any backlash against Japan’s strategy.
You have more conviction of a stronger dollar against the yen than a stronger dollar against the euro…
The euro is a fundamentally strong currency. It is a problem for Europe. I would compare the euro to what the yen used to be.
The euro area has a current account surplus. The ECB appears to be reluctant to be as easy as other central Banks. The inflation target in Europe is the core policy target for the ECB. Other central banks are far less committed now to inflation targeting. The combination of current account surplus and an hard money, inflation targeting central bank, will mean that the euro will remain relatively strong even if it could weaken a little bit against the dollar.
However, I don’t have a position regarding the euro dollar pair because it is very complicated. There are numerous factors leading to either an increase or a decrease. So I don’t have a target. A lot of forecasts were established for the end of the year and those levels have already been reached in the last few months.
What about the impact of the BoE on the sterling?
The impact has been relatively small the last six months. It seems as though (retiring) governor Mervyn King has wanted looser policy, but he was outvoted by the other members on the Monetary Policy Committee. The BoE has ended up doing nothing. Obviously, from July, monetary policy will be influenced by the arrival of the new governor, Mark Carney. However, right now, we don’t know exactly what he will do.
The UK economy has to continue with the slow process of deleveraging. This means policy is likely to stay easy. As for sterling, it is likely to see selling pressure and remain vulnerable. However, it is difficult to have a strong conviction on sterling before Carney shows his hand.
What is your opinion on a new policy target aimed at growth?
One of the problems in UK is that we don’t forecast GDP very well. We look at the last GDP release, there were a lot of revisions, especially because of the employment component.
You have negative position in Australia and the New Zealand dollars?
The Australian dollar is mostly governed by the deteriorating fundamentals, the overvaluation, the peak in the mining boom and the falling of commodities prices that Australia exports. This decline is related to increase of supply of commodities following the investment bull and the structure of the growth in China. We think commodities prices will remain soft.
In the case of New Zealand, fundamentals are not deteriorating as quickly. Support from domestic demand and from high rate is stronger. We are worried by the fact that the market has a much bigger long positions in New Zealand dollar. The market could anticipate an exit of these positions. So we could have a correction.
Imen Hazgui