FXstreet.com (Barcelona) - Kit Juckes, Global Head of Foreign
Exchange Strategy at Societe Generale notes that 2013 is a week old
and the major headwinds facing the global economy have been tamed
for now, while the world's investors still face the central problem
of derisory yields on any kind of 'safe-ish' asset. He sees that
there is little timidity on display as the hunt for yield drives
asset inflation onwards. Risk is 'on', Asian and Latam currencies
are 'winning' and the G3 are floundering.
Previously, he has felt that USD/JPY has the potential to push 97
by year end 2014 and his main concern has been that they had seen
such a sharp move already on the back of expectations of policy
change, causing the market to get ahead of itself and ultimately
vulnerable to a savage correction. However, he emphasises that his
core belief is still that we are seeing a long term change in the
Yen´s trading range, as Japan´s policy makers react to an
He comments that rather than interest rates becoming less important
as a driver of USD/JPY, they have just stopped moving, so factors
that are usually swamped by relative rate shifts are now moving
enough to matter. In particular, there´s a feedback loop between
the currency and the level of the Nikkei (notably relative to the
He adds, "We've always known that a weak yen boosts exporters'
profits, and helps the Nikkei. But the causality can run the other
way too - a strong Nikkei drives expectations of a weak yen,
encouraging quant driven FX models, to put on yen shorts against
higher-yielding currencies. If anything is a recipe for over shoot
in USD/JPY (and NKYT, for that matter) it is a bunch of FX models
seeing short yen signals in rising equity indices at the same time
as equity investors buy the Nikkei because the yen is weakening!"
Juckes´ colleague Sebastien Galy has taken a look at fair value
levels, where the over-riding conclusion is that the issue is less
USD/JPY, than Yen crosses. He notes that deflation has helped make
Japan more competitive and the most recent USD/JPY low was nothing
like as brutal for the economy as the levels reached in 1995.