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Buy ‘Cheap’ Yen Before Its Big Awakening in 2019, SocGen Says

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Buy ‘Cheap’ Yen Before Its Big Awakening in 2019, SocGen Says

  • Pause in Fed hikes or expectation of tighter BOJ seen as fuel
  • ‘Overvalued’ U.S. currency may turn into a loser next year
Photographer: Akio Kon/Bloomberg

It’s time to start loading up on “cheap” yen.

Using options to bet on gains for Japan’s currency is a smart wager for 2019, according to Societe Generale. The yen reached its weakest since early October on Friday, before recovering as concern over China’s economy fueled declines in global equities and eroded risk appetite.

The yen traded at 113.85 per dollar as New York trading got underway Friday, rebounding from 114.09 earlier. It touched that level after the Federal Reserve on Thursday left rates unchanged and stayed on course to hike next month. SocGen sees the greenback’s 2018 high of about 114.50 yen on Oct. 4 as an area of technical resistance.

“On top of being a good entry point to buy yen, we think investors should consider rising risks of a sharp yen bounce in the medium term,” Olivier Korber, a currency derivatives strategist at SocGen, said in a research note Thursday.

The call for a yen rally dovetails with the firm’s assessment, laid out in a separate research piece Thursday, that the dollar is “overvalued.” Although SocGen said it’s wary of selling the greenback too soon because the U.S. economy is “still running hot,” the job market remains robust and the Fed is unlikely to signal a pause just yet, it sees a shift next year.

The result of the U.S. midterm elections, which produced a divided Congress, “supports the idea that the best quarter for economic growth in the current cycle will prove to be Q3 2018, and it’s all downhill from here,” Kit Juckes, a global fixed-income strategist at SocGen, wrote separately Thursday. “That suggests rates may peak next summer, at the same time as other, lagging central banks in Europe start raising rates.”

Bullish Echo

Morgan Stanley echoes the bullish bias toward yen. Strategists including Hans Redeker wrote in a research note that they see the makings of a temporary steepening of the U.S. yield curve, which would signal a sell for both risk and dollar-yen. “The re-allocation of U.S. investments into high-carry U.S. money markets suggests it will not take much to start seeing USD declines, particularly if growth slows or risk appetite worsens again,” they wrote.

To wager on a stronger yen, Korber recommends buying an option structure known as an “appearing put spread,” expiring in a year. The structure includes the simultaneous purchase and sale of put options with different strike prices. One option has a feature that bets the yen won’t move below 100 per dollar over the lifetime of the structure.

Yen bulls will be looking for a pause in U.S. rate hikes by the Fed, expectations of Bank of Japan tightening or more risk aversion, he said.

“The potential for higher U.S. rates appears minimal compared with super low Japanese rates,” Korber wrote.

Counter View

JPMorgan Chase & Co. says the risk of a weak yen next year cannot be ruled out.

A deteriorating trade balance, high oil prices and further widening of U.S.-Japan rate differentials would all put pressure on the yen, and its weakness would mean a rally for Japanese equities, strategists including Ryota Sakagami and Tohru Sasaki wrote in a note Thursday.

Should Japan post a trade deficit in 2019, and the gap between 10-year yields in the two countries widen by a further 30 basis points, the dollar could rise to its 2015 highs of about 125 yen, they wrote.

— With assistance by Austin Weinstein, and Shikhar Balwani

(Updates prices.)