Wall Street strategists are divided on the sustainability of the yen's recent rally, even as the Bank of Japan (BOJ) is reportedly leaning towards a quarter-point rate hike this month due to rising inflation. While some, like Wells Fargo & Co., believe the BOJ's capacity for further rate increases might be limited, potentially capping yen gains, JPMorgan Chase & Co. suggests that a stronger yen itself could reduce the BOJ's incentive to raise rates further.
The yen has seen a significant surge, strengthening almost 4% this month and becoming the best performer among Group-of-10 currencies. This rally has upset the carry trade, where investors borrow in low-interest currencies like the yen. Early signs of capital repatriation and expectations of accelerated monetary tightening by the BOJ, alongside US pressure, have contributed to this strength. The currency had hit 40-year lows in July, prompting a joint US-Japan intervention.
Hedge funds are betting on continued yen strength, with some targeting a move below 150 against the dollar by year-end and even as low as 140 through longer-dated options. For instance, the most active dollar-yen option on Tuesday was a put option expiring in November with a 142.86 strike price. Total put volumes for contracts expiring by year-end were triple that of calls, indicating strong sentiment for a weaker dollar against the yen. Currently, the dollar-yen traded at 153.61 on Wednesday morning in Hong Kong.
A stronger yen and lower yields are also seen as potential boosts for Japan's AI and semiconductor shares, according to JPMorgan strategists. They suggest that the stronger yen could ease upward pressure on Japanese government bond yields, thus aiding a recovery in these sectors, as well as in real estate. However, some sectors like transportation, logistics, and autos are expected to face negative earnings impacts from a rising yen.
