Why The Yen Defies, Befuddles and Dazzles

- "Earlier this month, USD/JPY fell to 84.7 - its lowest level in fifteen years. The all-time low of
79.7 was reached in April 1995 and is now in sight (see chart). This comes in the face of the consensus of opinion consistently looking for yen weakness. Indeed, currently the consensus of analysts’ forecasts expects USD/JPY will trend higher, rather than reach new lows over the coming quarters. We have been looking for yen strength consistently since May 2009 (see FX Blueprint for Summer ’09, 12 May 2009). Part of this view was premised on US rates being low for long and the possibility of risk aversion. The link between US interest rates and the yen is well known and widely followed, however it is not the whole story for the yen. There are have been three important, but less well known developments that provide further support to the yen: the smaller gains for the yen in real terms than nominal terms, Japan’s growing income balance and foreigners being underweight JGBs. Taken all these factors together, we maintain our view of yen outperformace, and look for USD/JPY to reach 80 over the next six months, and possibly even 75."

DeutscheBank Exchange Rate Perspectives 20100824

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