For years, global investment players have put on positions via the so-called “yen carry trade.” Basically, traders borrowed money in Japan at low rates and invested in other currencies around the world. Analysts say the carry trade has been utilized across virtually all types of financial assets and risk exists for a massive unwinding once those positions no longer become profitable.
In 2005, the dollar/yen pair (USD/JPY) posted a hefty rally from around 101.60 to 121.41 by December. Growing economic conditions and a rising rate environment in the U.S. were seen as key factors supporting that rally. Since early 2006, dollar/ yen has shifted into a sideways consolidative type of environment. The pair has been confined to roughly the 114-120 region for the past several months.
The bottom line is the removal of quantitative easing is essentially the beginning of a tightening of monetary policy, which should ultimately be a bullish factor for the yen. However, Fink believes the dollar/yen will likely remain range-bound between the 115-121 zone for the remainder of the first half of the year.
Looking into the second half, Fink points to the potential for a slowing in U.S. and global growth. That could translate into a weaker appetite for Japanese players to invest abroad, which would weigh on dollar/yen. Fink forecasts a decline in dollar/yen in the third quarter below the recent support zone, with a target of 109 by year-end.
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