Yen Rally Gets No Relief With Bets on Bernanke Easing (Update1)

By Matthew Brown and Liz Capo McCormick
Sept. 7 (Bloomberg) -- Growing pressure on the Federal Reserve to print more money to bolster the U.S. economy will likely boost the yen and franc just as the Japanese and Swiss governments seek weaker currencies, if history is a guide.
Those currencies appreciated the most on a relative basis after Fed efforts between December 2007 and March 2009 to jumpstart the economy expanded the central bank’s balance sheet to as much as $1.15 trillion, a Barclays Capital analysis of 17 exchange-rate pairs shows. Bank of America Merrill Lynch raised its forecast for the yen last week, citing market expectations for the Fed to resume buying Treasuries.
Stronger currencies are the last thing Japan and Switzerland need as their exports become less competitive.
Reports the past few weeks showing slow inflation and a weakening housing market raise the chance that Fed Chairman Ben S. Bernanke will again inject cash into the economy through a process known as quantitative easing.
“The yen is almost guaranteed to strengthen against the dollar with a second round of QE,” said John Normand, global head of foreign-exchange strategy in London at JPMorgan Chase & Co., the second-biggest U.S. bank by assets.

Yen, Franc

Japan’s currency traded at 84.06 per dollar as of 7:01 a.m.
in London, strengthening from 94.99 in May and approaching its all-time high of 79.75 in 1995. It gained last week even after Japanese Prime Minister Naoto Kan promised “bold” action to stem the rise.
The yen has gained 46 percent since December 2007, the most of any of the 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. Rather than using a weighted average of exchange rates based on trade data, which is reported on lag and subject to revision, the indexes calculate weights based on variances in exchange rates.
Likely U.S. opposition to unilateral action would be an obstacle to Japan intervening in markets to weaken the yen, three Japanese government officials have said under condition of anonymity because the discussions are private.
The Bank of Japan kept borrowing costs and the size of its liquidity injections unchanged today, taking a pause in monetary stimulus to monitor the yen’s moves and U.S. economic data after expanding a credit program a week earlier.
Switzerland’s franc was at 1.0117 per dollar today, appreciating from as weak as 1.1731 in June. It strengthened to a record level of 1.2852 per euro on Aug. 31 after the Swiss National Bank abandoned attempts to weaken the currency earlier this year. The franc has gained 21 percent since December 2007, second only to the yen on a correlation-weighted basis.

Housing, Jobs

The franc and the yen tend to strengthen during periods of financial stress because their export-reliant economies don’t need foreign capital to balance current accounts -- the broadest measure of trade. Exports accounted for more than half Switzerland’s gross domestic product in the second quarter, while the figure was 16 percent in Japan and 13 percent in the U.S., Bloomberg data show.
The likelihood of a second round of easing increased after the Fed on Aug. 10 adopted a policy of reinvesting the maturing proceeds from its holdings of mortgage-backed securities into Treasuries. Since then, reports showed sales of new homes fell
12 percent in July to a record low pace of 276,000, and those of previously owned dwellings tumbled 27.2 percent to a 3.83 million annual rate.

Yen’s a ‘Winner’

Quantitative easing remains “on the horizon” after a U.S.
report on Sept. 3 showed companies added more workers in August than forecast as the unemployment rate rose to 9.6 percent, Paul McCulley, a managing director at Pacific Investment Management Co., said on Bloomberg Television’s “In the Loop” with Betty Liu. Newport Beach, California-based Pimco, the world’s biggest bond investor, manages the $247.9 billion Total Return Fund.
“Should further action prove necessary, policy options are available to provide additional stimulus,” Bernanke said at a gathering of central bank officials and economists at Jackson Hole, Wyoming, on Aug. 27.
The Fed may return to quantitative easing if unemployment rose for two consecutive months, according to JPMorgan’s Normand. Barclays’ head of European currency strategy, Paul Robinson, said while a resumption of asset purchases isn’t its “core scenario,” it’s “far from impossible.”
“The yen is going to be the initial winner from QE2, because it means lower U.S. yields,” said David Woo, head of global rates and currency research at Bank of America Merrill Lynch in New York. “If the policy isn’t successful then that’s even more bullish for the yen.”
Currencies of economies reliant on commodities are also likely to benefit from quantitative easing as the extra supply of money supports inflation, said Douglas Borthwick, a managing director at Faros Trading LLC in Stamford, Connecticut.

‘Printing Dollars’

“Printing dollars causes inflation, which will cause commodity prices to go higher,” Borthwick said. “The Australian and Canadian dollar as well as the Brazilian real and South African rand will strengthen relative to the U.S. in that environment.”
The Barclays study examined currency movements around Fed decisions as a means of assessing the likely reaction to quantitative easing. They found that the yen and franc tended to outperform before and after the decisions. Emerging-market currencies did worse.
The yen rallied as much as 14 percent against the dollar in the nine months following the Fed’s announcement of quantitative easing on March 18, 2009. Canada’s currency appreciated 20 percent, the franc 16 percent, and Australia’s 43 percent.

Close to Peaks

Canada’s dollar would be the biggest winner this time because of its proximity to the U.S., Robinson said. The currency traded at C$1.0371 per U.S. dollar today, strengthening from C$1.3065 in March 2009.
Implied volatility from options trading monitored by Bloomberg shows a 47 percent probability of the yen reaching its postwar high of 79.75 per dollar this year, trading in currency derivatives shows. There is a 53 percent chance of the Australian dollar reaching 95 U.S. cents in the same period, from 91.29 cents today, the data show.
These currencies may be close to their peaks should Bernanke avoid quantitative easing. The median estimate of 37 strategists and economist surveyed by Bloomberg is for the yen to end the year at 90 per dollar and weaken in 2011 to 98.
Strategists see the franc depreciating to 1.09 per dollar and 1.33 per euro by year-end, according to separate surveys.
The Australian dollar is estimated to finish the fourth quarter at 88 U.S. cents, and the Canadian dollar at 1.05 per U.S.
dollar.

Biggest Loser

The biggest loser from the last round of QE was the U.S.
dollar. The Dollar Index, a gauge of the currency against the euro, yen, pound, franc, Swedish krona and Canadian dollar, fell as much as 15 percent after quantitative easing was announced, as greenbacks flooded the market and an improving global economy cut its appeal as a haven.
The dollar may avoid a tumble this time, according to Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees’ Retirement System. The largest U.S. public pension manages $204 billion.
“Quantitative easing is usually inflationary, but we could well be in a deflationary spiral and the Fed is taking the appropriate policy measures,” Busay said. “That is good for the dollar.”

Sounds like whoever wrote this article is short the USD....I did not interperet Bernanke's comments at jackson hole to mean further QE is in place ready to go. I took his comments more as ' the economy is growing slowly, but if it stops growing we will help.' I am short the yen at these levels....