Yen strengthens from five-year low on Fed views

Yield Spreads

The dollar rose versus the yen this week as Treasury 10- year yield traded at 2.86% after rising two basis points yesterday, according to Bloomberg Bond Trader prices. The yield premium over equivalent Japanese government bonds was at 2.18 percentage points, almost the 2 1/2-year high of 2.24 reached on Dec. 5.

The Fed will probably begin reducing $85 billion in monthly bond purchases at its Dec. 17-18 meeting, according to 34% of economists surveyed on Dec. 6 by Bloomberg News, an increase from 17% on Nov. 8.

“The prospect of Fed tapering, either sooner or later, and continued monetary easing by the Bank of Japan remain a powerful driver of dollar-yen gains specifically, and obviously broad yen trade-weighted depreciation,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. The yen will drop to 110 per dollar at the end of next year, according to Standard Chartered, compared with a median forecast of 108 in a Bloomberg News survey of analysts.

Central Bank

The BOJ, which buys more than 7 trillion yen ($70 billion) of Japanese government bonds every month in its bid to stoke inflation, starts a two-day meeting on Dec. 19. The central bank aims to keep ultra-easy monetary policy in place beyond the two- year timeframe, the Financial Times reported, citing an interview with Governor Haruhiko Kuroda.

The yen has weakened 14.3% this year, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 3.9% and the euro climbed 8.5%, the biggest advance.

“The reasons why the yen is depreciating now are the same reasons it was depreciating earlier in the year, it’s the fact that people are talking about chances that the BOJ will expand its monetary policy again” next year, said Sonja Marten, a currency strategist at DZ Bank AG in Frankfurt. “To a degree if the Fed begins tapering this puts it on a path that can eventually lead to higher rates and this might be a factor too” pushing the yen lower against the dollar, she said.

The euro area’s recovery is muted and fragile, ECB Executive Board member Praet said in Antwerp.

Options Trade

Trading in over-the-counter foreign-exchange options totaled $34 billion, from $52 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar- yen exchange rate amounted to $12.4 billion, the largest share of trades at 36%. Options on the Aussie dollar-greenback rate totaled $4.4 billion, or 13%.

Dollar-yen options trading was 4% more than the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Aussie-greenback options trading was 32% above average.

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