Yen in Free Fall as Trading Floors Struggle with Predictions
Global trading floors are in disarray when it comes to predicting exchange rates. Even experienced FX traders admit they have no idea what direction currencies will move in the next year or two.
The Yen is particularly troublesome, having fallen despite dovish US inflation data that should be lifting the currency against the Dollar. The recent lack of a rally is 'extremely concerning', according to Robin J Brooks.
A chart from Brooks shows daily $/JPY data during three intervention episodes this year. Each time, the Yen fell steadily after the intervention, including this week's dovish US inflation surprises. This should be a setting where the Yen rallies versus the Dollar, but instead it continued to fall.
The cause of the problem may lie in BoJ policy, which needs a 'profound shift'. Brooks argues that scaling back BoJ buying of government bonds would allow long-term JGB yields to rise towards their 'shadow yield' levels, strengthening the Yen.