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POLL-Yen to weaken vs dollar as carry trade returns

Published 04/06/2011, 09:15 AM
Updated 04/06/2011, 09:20 AM
USD/JPY
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* USD/JPY forecasts unchanged from last poll

* Dollar still seen hitting 90 yen in a year's time

* Swiss franc to depreciate against euro in a year

By Anooja Debnath and Yati Himatsingka

BANGALORE, April 6 (Reuters) - Coordinated currency intervention coupled with a possible return to carry trades will weaken the yen, even as repatriation flows after Japan's devastating earthquake provide support, a Reuters poll showed.

A monthly survey of over 60 strategists, taken April 1-6, saw the dollar at 83 yen in a month from now, 86 in six months and 90 in a year -- exactly the same levels as seen in the previous month's survey.

The dollar closed at 83.15 yen on March 31 and was trading around 85 earlier on Wednesday as the Japanese currency hit a six-month low.

Only two analysts saw the yen over the next year strengthening past its post-World War Two record of 76.25 per dollar hit in March, but the poll showed a wide range of views.

Twenty-two of 58 common analysts in this poll and the last have downgraded their forecasts and see a weaker yen in a year, while 17 upgraded them.

Major central banks from the Group of Seven nations intervened in currency markets to stabilise the dollar/yen last month as domestic investors scurried to meet payment obligations in the aftermath of Japan's biggest earthquake on record.

"Now the yen is even weaker than before the catastrophe. This, to us, looks like an exaggeration as the repatriation need persists and heightened risk aversion should also play out in favour of the yen," said Sebastian Wanke, economist at DekaBank.

Japan's former currency czar Eisuke Sakakibara said on Monday the yen will keep weakening over the next few months and possibly fall beyond 90 to the dollar as severe market turmoil might prompt the G7 nations to jointly intervene again.

The yen has been on a downward trend since the rare joint intervention last month revived interest in the yen "carry trade" -- a strategy of using cheap yen loans to fund higher yielding investments.

The Bank of Japan (BOJ) is expected to keep interest rates on hold at its two-day meeting starting Wednesday, but signal its readiness to embark on further easing of its ultra-loose policy as the environmental disaster triggered by the March 11 earthquake threatens to tip the economy back into recession.

RATE HIKES

In contrast, there are strong expectations the European Central Bank will bump its key policy rate up 25 basis points from a record low 1 percent on Thursday to curb inflationary pressures, with markets already pricing in more tightening later in the year.

"The determination of the Japanese authorities to prevent the yen from strengthening, taken together with adverse yield differentials and prospects of the yen regaining its mantle of funding currency, point to increasing downside risks," said Mitul Kotecha, head of global foreign exchange research at CA-CIB.

Favourable yield differentials as U.S. Treasury yields move up faster than their Japanese counterparts, coupled with brightening prospects for the U.S. economy will add strength to the greenback.

Minutes from the Fed's March 15 meeting, released on Tuesday, showed a few officials thought a stronger economy could warrant tightening monetary conditions this year, although others believed the Fed could maintain its ultra-loose stance beyond 2011.

"I think the risks (to USD/JPY) are to the upside, but it won't be so much a yen story as a dollar story should we get more positive data, and monetary policy expectations in the FOMC are brought forward," said Raghav Subbarao, currency strategist at Barclays Capital.

The yen's annualised volatility hit a 10-month high of 15.6 percent in March in the immediate aftermath of the devastation caused by the earthquake but is seen falling to 11.6 percent in April.

Cross rates calculated by Reuters saw the euro trade at 118 yen in a month, 119 in six and 122 in a year, compared with 113, 115 and 119 yen respectively seen in last month's survey.

The poll also showed calculated euro Swiss franc cross rates at 1.31 in a month, 1.32 in six months and 1.35 in a year. Those consensus forecasts were 1.29, 1.31 and 1.35 in last month's poll.

(For other stories from the poll click on)

(Polling by Bangalore Polling Unit; Editing by John Stonestreet)

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