Wall Street strategists are divided on the outlook for the Japanese yen's rally, which has seen the currency strengthen significantly against the dollar, reaching a seven-month high. This comes ahead of a highly anticipated Bank of Japan (BOJ) meeting next week, where an interest rate hike is widely expected. The yen's surge has been attributed to early signs of capital repatriation, expectations of a faster pace of monetary tightening by the BOJ, and even pressure from the United States. The currency had previously hit 40-year lows in July, prompting a joint US-Japan intervention.
Some analysts, particularly those at Morgan Stanley, believe that popular carry trades, which involve borrowing in low-yielding currencies like the yen to invest in higher-yielding assets, can withstand the yen's gains. Morgan Stanley strategists, led by James Lord, global head of foreign exchange and emerging markets strategy, argue that these trades should be resilient unless there's an additional catalyst that raises broader market volatility. They suggest that the recent yen strength, while notable, may not be enough to derail these strategies.
However, other strategists are more cautious. Reuters reported that the yen's blistering rally is "upending the long-established and lucrative carry trade," as investors reassess the currency's volatile path. This perspective suggests that the sudden appreciation of the yen is causing significant disruption for traders who have profited from borrowing the yen cheaply. The vulnerability of the carry trade is a key concern for these analysts.
The yen's move has pushed the USD/JPY pair through key levels, with the currency strengthening to as much as 152.89 per dollar before pulling back slightly. Some observers believe the rally was amplified by thin liquidity due to a US holiday. While short-term fundamentals might suggest the move is overdone, many find it risky to bet against the yen given the potential for further carry trade unwinding and the looming BOJ decisions. Further support for the yen is seen at 152.0, with a break below potentially opening the way to 150.0.
The broader dollar sentiment remains affected by the yen's strength, even as other factors like strong payrolls and elevated energy prices (with Brent crude nearing $100 per barrel) offer some support to the US currency. Markets are currently pricing in only about 15 basis points of tightening for September, and risk sentiment has remained relatively stable despite the currency fluctuations. The split among strategists highlights the uncertainty surrounding the yen's trajectory and its potential impact on global markets.
