The yen will extend losses that made it the worst-performing major currency in the past six months after the Group of 20 refrained from directly censuring Japanese policies driving the changes, Morgan Stanley and UBS AG said.
The language of the final G-20 communique released in Moscow on the weekend fell short of last week’s Group-of-Seven statement and means recent trends in major currencies are now set to resume, Morgan Stanley’s foreign-exchange strategy team led by Hans Redeker in London, wrote in a research note. The fact the G-20 didn’t single out Japan means the yen may weaken toward 100 per dollar in the next few months, UBS AG said in a separate report.
Two days of talks between G-20 finance ministers and central bankers ended in Moscow Saturday with a statement pledging not to “target our exchange rates for competitive purposes,” without singling out Japan. Japanese officials denied driving down their currency, saying its decline was a byproduct of their effort to revive the economy. U.S. Treasury Undersecretary Lael Brainard used a speech in Moscow to criticize “loose talk about currencies.”
The yen has tumbled 16 percent in the past six months to 93.50 per dollar at the close in New York on Friday as the government of Prime Minister Shinzo Abe pressured the central bank to step up stimulus. The decline is the most of 31 major currencies tracked by Bloomberg versus the greenback.
“With the risk of a stronger G-20 position on currencies out of the way, the major currency trends should resume,” the Morgan Stanley analysts wrote in the note published Saturday. “Policy makers worldwide can claim that their policies are in line with the G-20 and G-7 statements. In short, the G-20 will not constrain the Bank of Japan.”
With the G-20 now over, the main focus for the yen is on who will be appointed to replace BOJ Governor Masaaki Shirakawa, who intends to step down on March 19, Morgan Stanley said.
Abe is likely to nominate Asian Development Bank President Haruhiko Kuroda, who is set to pursue the government’s anti- deflation course, though if he nominates former BOJ deputy governor Toshiro Muto that may trigger the yen to retrace some of its losses back to 90 per dollar, Morgan Stanley said.
Investors should forget the G-20 and G-7 as their statements didn’t single out Japan for manipulating its exchange rate, according to UBS’s Global Head of Foreign-Exchange Strategy Mansoor Mohi-Uddin.
The trend remains for the yen to weaken “in a 90-100 range over the next few months,” he wrote. “Moreover, U.S. Treasury Undersecretary Brainard said that while policy makers should avoid ‘loose talk’ on currencies, she didn’t row back from her earlier comments that America was supportive of Japan’s efforts to reinvigorate growth and end deflation.”
An announcement on who will be the next BOJ governor is expected either before or after Abe meets President Barack Obama in Washington on Feb. 22, Singapore-based Mohi-Uddin wrote.
Japan’s currency has tumbled 19 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar fell 2.2 percent and the euro strengthened 7.3 percent. U.S. financial markets will be shut Monday for a holiday.
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