Yen Gains Most in 3 Months as Kuroda Says More Weakness Unlikely

June 10, 2015 Bloomberg

by Rachel Evans & Lananh Nguyen

The yen advanced the most in almost three months after Bank of Japan Governor Haruhiko Kuroda said further declines are “unlikely.”

Japan currency rose against all of its major peers as Kuroda told lawmakers that the yen, which touched a 13-year low of 125.86 versus the dollar last week, is already “very” weak on a real effective basis. The U.S. currency slid a third day as oil rallied and traders await reports Thursday that may indicate whether the U.S. economy is strong enough for the Federal Reserve to raise interest rates for the first time since 2006.

“Policy makers have clearly mounted a defense of the 125 level,” Karl Schamotta, director of foreign-exchange research and strategy at Cambridge Global Payments in Toronto, said by e-mail. “After a disorderly decline in recent weeks, policy makers have a clear incentive to jawbone the currency into stability, but are also aware that Japan’s economy is benefiting as historic overvaluation corrects itself.”

The yen rose 1.3 percent to 122.68 as of 5 p.m. in New York, its biggest increase since March 18. Japan’s currency added 1 percent to 138.90 per euro.

The Bloomberg Dollar Spot Index fell 0.8 percent to 1,171.61, posting its longest run of losses since May 15.

Kuroda Comment

The Japanese currency climbed a third day versus the U.S. currency after Kuroda said the real effective exchange rate, which adjusts for inflation and trade with other nations, has already come a long way.

The rate is 1.8 standard deviations lower than its average over the past 10 years, according to data compiled by Bloomberg based on Bank for International Settlements figures.

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come,” the governor said Wednesday. The currency has dropped to levels it was at before the collapse of Lehman Brothers Holdings Inc. in 2008, Kuroda said.

“It is an audible shift in tone,” said Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA. “It’s not for the first time that they’ve been expressing preference for a more two-way market at these levels and that’s why you’re seeing the pullback.”

The central bank is undertaking a program of unprecedented easing to boost inflation and encourage growth after two decades of stagnation in the nation. A weaker currency has been at the heart of that effort, making exporters more competitive internationally even as importers suffer.

The yen is the second worst performer during the past three months after the New Zealand dollar, losing 4.7 percent against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

“When Kuroda says it’s hard to see the yen dropping more, that sort of says ’let’s take a break here,’” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone.

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