Yen selloff set to halt

The currency would need another push from US inflation
Newsfeed21 Oct 2021
    Photo credit: AFP Photo

    The yen appears to be at the mercy of American inflation expectations, which means the current selloff is likely to stall unless US rates keep moving higher.

    The ratio between three-month call and put options on the dollar-yen currency pair – a so-called risk-reversal – has been tracking closely a commonly used measure of market expectations for US consumer price gains, the 5Y/5Y forward rate. And with inflation expectations surging, that dynamic has helped make the Japanese currency the worst performer this month among G-10 peers.

    The yen has weakened more than 2.5% against the greenback so far in October to around 114 per dollar, while most other major Developed Markets counterparts have notched gains. And it is down close to 10% for the whole of 2021. Meanwhile, solid economic growth in the US coupled with supply chain difficulties and a commodities’ shortage has pushed inflation expectations to levels unseen since 2017. The upshot is that those expectations of price gains probably need to keep on rising from here for the yen move to maintain momentum.

    More bearishness in the yen “would involve breakevens rising towards 3% and a new selloff in the bond market, which is now on hold”, according to strategists. But with positioning on the currency potentially having peaked, the move in dollar-yen could falter if it fails to punch through 115 this week, they wrote in a note Tuesday (19 October).

    Data from the Commodity Futures Trading Commission show that speculative bets against the yen have already increased in the past few weeks. While that may go further, it could also mean that traders might soon look to tap the brakes on the most recent move. – Bloomberg News.

    The US Dollar Index slipped 0.19% to 93.558, the euro climbed 0.15% to USD1.1651, the pound gained 0.20% to USD1.3824, and the yen strengthened 0.06% to 114.31 per dollar.

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