The dollar will fall, and the yen will strengthen in 2016. The Fed could not continue to raise rates, and the strong yen will be back again as the Bank of Japan’s monetary expansion is now limited.
There might be a number of investors who still bet on the yen’s fall due to Abenomics, but we recommend to reconsider. We even recommend to buy the currencies under quantitative easing, such as the yen or the euro. Here are the reasons.
Buy the currencies already with QE
Basically, in 2016 there is no currency we want to buy. All of the advanced countries have already relied on the massive monetary easing, and even the US economy, which is considered to have successfully finished QE, is suffering from a slowdown.
The commodity currencies might have a better year than 2015, as the gold price and the oil price are coming near the long-term bottom.
- WTI crude oil price forecast 2016: shale oil industries’ bankruptcies and OPEC’s production cuts
- Gold price will go up to $2,000: the Fed’s rate hikes, the currency war and the secular stagnation
However, the upside of the oil price is still limited, and thus they will still have a difficult time for a while.
The currencies of the developing countries are also quite at risk. Mr George Soros mentioned in Davos that China’s hard-landing has already happened, and so he is shorting Asian currencies.
What if no currency is to buy?
If there is no currency we can buy, and we still have to choose one, we would choose the currencies with the smallest downside risk. That means we choose the currencies that have the least room for further easing, and the yen and the euro are almost there.
The Bank of Japan (BoJ) and the European Central Bank (ECB) have already expanded QE and also introduced negative interest rates. The longer investors have followed the downtrend of these currencies, the more they understand that the future possibility of further easing is very essential for the trend to continue, and also that the absence of the possibility clearly means the end of the trend.
Although the ECB mentioned the restrictions about negative rates, the BoJ might still cut rates further. However, we need to note that cutting negative interest rates sounds more easing than normal rate cuts but actually less effective for the economy. As savers (including banks) have an option to hold cash, the deeper negative rates go, the more savers will exert that option, and the less effective rate cuts become. Investors recognize the central banks have little room for further easing, and it is reflected on the recent move of the yen and the euro.
The dollar to weaken
The bad news for USD/JPY is not just from the side of the yen. The dollar is also about to suffer from the recession risk.
Yet, why is the US economy slowing down? Have even QE not successfully supported the economy to a sufficient extent? This is not only about the US but about the common situation in the advanced economies.
The weakness of the advanced economies is explained as the secular stagnation. The concept was brought by Dr Larry Summers, and many of the great hedge fund managers agree or have similar views.
These economists explain that the lack of demand in the economies is a structural problem that cannot be shortly solved, and if they are right, the US economy will eventually slowdown to the level that requires to resume monetary easing. The Fed will need to stop rate hikes, and restart cutting rates or even QE.
The expected range of USD/JPY
Then, where will the currency pair be? We still agree that the BoJ’s monetary policy is extremely easing, and it would theoretically bring USD/JPY to 130-135, not considering any other circumstances.
However, nobody would buy USD/JPY when they know the further upside is not possible. So the theoretical top should be mended to be 125-130.
Furthermore, we need to consider the two factors. The first is the circumstances for the dollar. This is a rough estimate, but as the BoJ’s QE depreciated the yen by 40%, we assume 15% was brought by the start of the easing, and 25% was by QE itself. When the Fed turns to cut rates rather than raise rates, it will bring the expected range to be 110-115.
The second factor we need to note is the market sentiments. If the stock markets go down further, the risk-off sentiments will bring the currency pair down, regardless of the fundamentals.
Looking back, the first risk-off after Abenomics in the Japanese markets was in May of 2013, and USD/JPY temporarily went down by 10% from 104 to 94. As a more radical example, during the subprime loan crisis in 2008, it went down by 20% from 110 to 90. We expect something in between them might happen in 2016, so the expected downside is roughly 15%.
Conclusion
To summarize, we predict the range of USD/JPY to be 110-115 when the Fed resumes easing, and if at the time the markets are bearish, the risk-off sentiments could bring it to 95-100. If the Fed needs to restart QE, it could be back in 70s or 80s.
Although we recommended to buy the QE currencies if we must choose to buy one of the currencies, but we actually do not need to, as we can buy gold.
The commodity markets are the only markets in 2016 that have decent opportunities for investors. Choosing the right markets will reward you well especially this year.