Political scandal in Japan strengthened interest of hedge funds to USD/JPY sales


Unlike the political life of the USA, the eurozone and Britain, which is saturated with political scandals, Japan was a quiet haven. The situations involving Russian intervention in the presidential elections in the United States, Donald Trump's periodic conflicts with the Congress, German and Italian parliamentary elections, referendums on the membership of the Foggy Albion in the EU and the independence of Scotland boiled the blood of the dollar, euro, and pound. The yen, by contrast, received preferences because of its status as a safe haven asset. However, as you know, still water runs deep. And we finally saw just how deep.

The scandal surrounding the sale of state lands to the educational fund with a significant discount, in which Shinzo Abe's spouse was involved, stirred the masses last year, but in March new details surfaced. The tax authorities subordinated to the Ministry of Finance managed to forge documents on the memorable transaction, however, all the secrets sooner or later come to light. As a result, the Prime Minister's rating fell from 54% to 48%, and 70% of respondents to the Fuji News Network survey believe that Finance Minister Taro Aso must resign. The yen reacted sharply against the main competitors. The black spot fell on the reputation of not one particular person, but on the whole of Abenomics, which is based on the principle of weak currency. It is likely that the new leadership of the country will adhere to completely different approaches, including the normalization of monetary policy.

The latter, meanwhile, is in full swing. It's just that the Bank of Japan is consciously solent about it. Over the past 12 months, it has acquired assets under the quantitative easing program worth ¥54 trillion, which is significantly less than the QE scale (¥80 trillion). And no matter how much BoJ tried to inspire investors not to believe their eyes, but rather their ears, the fall of USD/JPY testifies that they do not listen to it.

Dynamics of USD/JPY and volumes of Japanese QE

Source: Bloomberg.


The inability of the previous growth drivers of the US dollar to support it in 2018, a fresh example of the impact of the monetary policy normalization by the ECB on the euro exchange rate and the external background favorable for foreign currencies make speculators exit short positions in the yen. Until record-breaking net longs are still a long way ahead, therefore, the potential for a bearish trend for USD/JPY is far from exhausted. The pair is quite capable of collapsing below the psychologically important 100 mark for the first time since 2016.

Dynamics of USD/JPY and speculative positions in the yen

Source: Bloomberg.


Let us not forget that a  helping hand is lent to the yen by the current account surplus of the Land of the Rising Sun. If we take into account the time lag of 12 months, then the correlation between them allows us to predict the continuation of the south-bound journey of USD/JPY.

Dynamics of USD/JPY and current account of Japan

Source: Bloomberg.


Thus, the risks of Tokyo's rejection of Abenomica, the normalization of BoJ's monetary policy, the growing interest of hedge funds to yen purchases and the improvement of Japan's foreign trade create prerequisites for the US dollar to decline to ¥ 105, ¥ 102 and ¥ 99 in 3, 6 and 12 months.


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Yen: still water runs deep

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