Mitsubishi UFJ Morgan Stanley Securities Co. and Westpac Banking Corp. are breaking from the pack to bet the yen will rally in 2014, which could threaten Japan’s efforts to reflate the economy.
The yen will surge 15% from its low for this year to about 90 per dollar, which would be the strongest level since last January, according to Naohiko Miyata at Mitsubishi UFJ, citing trading patterns. The yen slid 18% versus the dollar last year, the most since 1979, after Prime Minister Shinzo Abe began his economic strategy of fiscal spending, monetary easing and growth initiatives.
“We’ve probably reached a bottom in the yen, and if that proves to be true, we’ll see a large rebound,” Miyata, the firm’s Tokyo-based chief technical analyst, said by phone on Jan. 6. “Since the start of the Abe trade, we haven’t seen any corrections exceeding 10 yen. 2014 will probably be the year where we’ll see such a move.”
Last year’s drop in the yen helped push Japanese stocks to the highest levels since 2007 and stoke inflation past the halfway point of the central bank’s target. Miyata’s forecast contrasts with calls in a Bloomberg survey of strategists and economists for the yen to remain little changed at 105 per dollar through March before sliding to 110 by December.
Miyata, who correctly predicted the end of the yen’s 40- year bull cycle in 2011, cited a technical indicator known as the Elliott Wave for his latest call on Japan’s currency. The yen will surge after it completes what’s known as a five-wave bearish cycle, which has lasted about two years, Miyata said.
The yen fell to a five-year low of 105.44 per dollar on Jan. 2, and was at 104.01 as of 2:21 p.m. in New York. It dropped 17% last year against nine major peers, including the euro and British pound, according to Bloomberg Correlation- Weighted Currency Indexes.
The yen’s key test will be whether it advances past its 20- day moving average for the first time since November and breaches the Dec. 17 high of 102.50, according to Miyata. Such a move would be a “strong signal” the yen is starting a bullish cycle that will drive it to 100 in the next three months, he said. The 20-day moving average was 104.41 yesterday.
After a brief second-wave correction, the yen will gain past 90 in the third stage of the Elliott Wave, possibly around October, Miyata said. Japan’s currency may gain toward 86.84, a level known as the 61.8% Fibonacci retracement of its drop from a post-war high of 75.35 per dollar in October 2011 to its five-year low of 105.44 on Jan. 2, he said. Fibonacci analysis is based on the theory that prices move by certain percentages after reaching a high or low.