Morgan Stanley’s prediction for yen gains this year has proved so prescient the investment bank is concerned the rally may run into a roadblock from Japanese policy makers.
The New York-based bank withdrew one of its trading recommendations after the yen climbed to a 15-month high of 114.21 per dollar on Tuesday as Japanese stocks slumped, approaching Morgan Stanley’s trading target of 114.
Investors should take profit on positions betting on yen gains versus the pound, London-based strategists Hans Redeker and Sheena Shah, wrote in a weekly trading strategy note on Tuesday.
“Some verbal intervention by Japan’s monetary and fiscal authorities becomes increasingly likely,” Redeker, head of global foreign-exchange strategy, and Shah, a foreign-exchange strategist, wrote in an e-mailed note.
“However, this does not mean that we turn more constructive on risk. Instead, the risk outlook remains bleak.”
The yen has surged this year as haven assets benefited from a global stock slump and concern that the creditworthiness of global banks is worsening.
Japanese Finance Minister Taro Aso said on Tuesday. “rough moves” are occurring in the market and that he’ll continue to monitor developments.
Japan hasn’t bought or sold currency to sway the yen’s price since a record intervention in 2011 helped halt the currency’s climb to a post- World War II record.
Japan’s currency has strengthened against all its 16 major peers in 2016, rising 4.8% versus the dollar and 6.7% against the pound. The yen climbed 0.3% to 114.74 per dollar in London, after briefly erasing earlier gains Wednesday.
“The market is now in a very nervous mode,” said Yuji Saito, head of the foreign-exchange department at Credit Agricole SA in Tokyo.
Bank of Japan Governor Haruhiko Kuroda helped limit the yen’s decline last year when he said it was hard to see the currency falling more after its slide to a 13-year low of 125.86 per dollar in June.
The economy and finance ministers also said around that time they were concerned about “abrupt” and “rough” moves in foreign-exchange markets.
Morgan Stanley also advised traders to switch to positions that would benefit from the euro strengthening versus the dollar, according to the note.
The shared currency may advance to as strong as $1.14 in the short term, from $1.1288 yesterday, as traders seek “quasi-bullish yen trades” following the Japanese currency’s rally, the strategists wrote.
The recommendation to bet the euro will gain against the dollar is “tactical” and should not be confused with Morgan Stanley’s more negative outlook for the shared currency over the longer term.
There are increasing signals it will enter “a full- scale bear leg in spring/summer,” Redeker and Shah wrote.