Yen's Slump to Past 160 Is Function of Fundamentals, BofA Says

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Bloomberg Apr 29 04:40

Claudio Piron, co-head of Asia foreign exchange and rates strategy at BofA Securities, says the weakness in the Japanese yen, which dropped as much as 1.2% to 160.17 per dollar on Monday before the move pared, says is "a function of fundamentals in a certain sense." He speaks on "Bloomberg Markets: Asia."

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  • 00:00 So some say this yen bridging 160 has to do with algo 's fat finger but
  • 00:04 maybe it's just a case of traders wanting to push and see how far it can go lower yeah absolutely I mean it's just a
  • 00:11 function of fundamentals in a certain sense the US data continues to be very strong as you've just mentioned the earnings fantastic as well
  • 00:18 so it's a difficult position that the BOJ finds them themselves in because if you intervene
  • 00:23 really the most important thing is you have to be credible.
  • 00:26 And so that issue comes right against that issue in terms of the US data rather and the yield gap that is presented to themselves so when you're faced with that it's not just then a question of the credibilities and how to calibrate
  • 00:38 particularly in thin liquidity so I think any action that they will come in will be a smoother action it won't be the heavy fisted action that we saw in 2022 for example.
  • 00:47 Candle has come up to say that it will intervene if it sees rapid movement what exactly he says if you see a 10 yen move within a period of
  • 00:56 a month we've seen 7 in a month but 2% in a week
  • 01:01 and 10% on the year that's massive it
  • 01:04 is massive one of the key thresholds and conditions we were looking for has been triggered now and that has been to see one month implied volatility in dollar yen move above the 10% threshold.
  • 01:13 And that to us characterizes the nature where the market is starting to get dislocated
  • 01:18 we saw a couple of weeks ago the Tri
  • 01:21 Tri statement trilateral statement from the Ministry of Finance and Japan Korea and the United states saying they're closely focused on orderly functioning of markets and if we start to see
  • 01:30 more in volatility come in through let's say an implied volatilities
  • 01:34 or as well what was noticeable last week was that
  • 01:37 the rest of Asia was relatively calm.
  • 01:39 Although then we saw bank Indonesia do a surprise rate hike which suggests well you know people are starting to get more worried what it means for other currencies in the region and I think that's the other threshold that we need to watch
  • 01:51 is the yen a problem for the rest of the Asia is it a problem for as well.
  • 01:56 U.S. Treasury markets and JGB markets it could be a problem for the yuan
  • 02:00 right I mean yuan goals would want to see intervention yeah in the yen yes absolutely and if we don't then maybe we start to get some incremental movement in dollar and NIMBY.
  • 02:11 And we've seen funding conditions ease up on dollar C&H and the C&H market that suggests that the tight grip of the PBOC is being a little bit more relaxed on that front so that may say well we might be willing to concede to some movement we've seen the dollar China fixing move above that incrementally above that 7.10 level so that may be a
  • 02:29 factor that
  • 02:30 they may be
  • 02:31 preparing for a little bit of adjustment on their side.
  • 02:35 Quarter end forecast for dollar and NB 735 and then for Q 3 Q 4745
  • 02:40 The thing is for Japan there's reason to exercise restraint
  • 02:45 in an environment of higher for longer we don't even know what the feds going to do or not do this year
  • 02:49 I mean
  • 02:51 could it
  • 02:52 I guess put its credibility into question if it just doesn't do anything.
  • 02:57 I think again it depends on the disorderly versus orderly kind of behaviour of the market yes you can
  • 03:03 examine this as being somewhat fundamentally explained what's also important is that to say that a lot is priced into the market in terms of the Fed in terms of the hawkishness of the Fed we've only got about 3335 basis points of rate cuts priced in
  • 03:16 so a lot of the kind of damage has been done in taking back those fed.
  • 03:19 Easing calls
  • 03:21 so you know again as long as they can adjust this currency in an orderly manner then I think we're OK
  • 03:28 but it is important particularly when we start seeing these 30 year
  • 03:31 levels being taken out in the market it it it starts to have a more meaningful consequences for everybody and so they may have to and.
  • 03:39 Can't come in to try to stabilize the situation you got to imagine all question how much is needed to actually support the currency
  • 03:46 I mean given that you don't know how high the dollar might go
  • 03:50 what is the level that is comfortable for both the BOJ and the Ministry of Finance is it below 150 is that the level that is comfortable.
  • 03:58 I think no I think in a certain sense if we were to get back to 150 level that would be OK by the end of the year I think that would be a comfortable level in some sense of of what we're seeing I mean it's important as well to look at real exchange rates in the region
  • 04:13 and if we look at real effective exchange rates in the region for the renminbi is actually quite weak it's at a 10 year low if we look for career as well as in a in a in somewhat similar position.
  • 04:23 So it's important to look not just at the nominal value of exchange rates but the real value of exchange rates and we're still faced by the fact that actually by that metric the dollar is looking over value the question for everybody is when does that dollar cycle turn and we keep extending that dollar
  • 04:39 and the US economy
  • 04:41 economic outlook out so I think.
  • 04:44 You know that has shifted to 2025 and that's where I think the ground has shifted to so I think everybody is now conceded that the rest of the year to some degree will see this dollar strength continue.