Yen’s outlook worsens as traders turn bearish, outflows increase

The strong yen is worsening. (Bloomberg pic)

SINGAPORE: The omens are looking bad for the yen.

Traders have boosted short positions on Japan’s currency for six straight weeks as signs that economic growth is slowing make it more likely the central bank will maintain its record monetary stimulus.

At the same time, global risk sentiment is improving as the US and China near a deal to resolve their long-running trade dispute, sapping demand for haven assets.

Japanese data due this week may add to the bearish yen mood: economists predict machine orders probably shrank from a year earlier in February, while producer price inflation was near a two-year low in March.

The Bank of Japan’s Tankan survey released last week showed manufacturers’ confidence tumbled the most in six years in the first quarter, while the government is set to raise the sales tax to 10% from 8% in October.

Even one normally yen-positive factor has so far failed to offer much relief. The extra yield on US Treasuries over Japanese government bonds fell to the lowest in more than a year last month, but only gave the yen a short-lived boost.

A more important factor than the yield spread appears to be investment flows. Japanese investors bought a net 7.85 trillion yen (US$70.3 billion) of overseas stocks and bonds this year through March 29, compared with 20.1 trillion yen they sent abroad last year, according to Ministry of Finance data.

“The dollar tends to be supported during this time of the year as Japanese investors are expected to allocate more of their funds abroad,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank & Trust. “These seasonal flows are expected to keep the yen under pressure. USD/JPY could weaken toward 112.30,” he said.

The yen has fallen 2.8% versus the dollar over the past three months to trade at 111.67 per dollar late on Friday in Tokyo. A break beyond the March 5 low of 112.14 would put it at the weakest this year.

The technical outlook remains bearish. The dollar-yen currency pair has rallied after dropping to support at around 110 at the end of March. Slow stochastics, a momentum indicator, shows a %D reading of 63, still below overbought territory, indicating there is still room for the pair to run higher.