If you're searching for the definition of a swoon, you could do worse than look at the yen over the past two months. Worries that Japan will soon embark on a new aggressive round of monetary stimulus has pummeled the currency of late.
So why is the yen rallying now?
To some extent, traders who sold the yen against the dollar are just booking profits. But Sean Callow, a senior currency strategist at Westpac Bank, thinks something else might be at work.
"From our point of view, you can't make a fundamental case for the scale of the gains and the speed that we've seen in dollar-yen over the past couple of months," he told CNBC. "We're not going to be too surprised by any particular pullback."
Callow also notes that new reports show traders scaling back their short yen positions.The dollar-yen trade, he says, "has really overshot a lot of the targets." Westpac thinks the yen will be back to 79.00 against the dollar in twelve months, Callow says.
But not everyone agrees. Camilla Sutton, chief currency strategist at Scotiabank, thinks the prospect of more government borrowing will soon weigh on the yen again.
"FX markets will need to decide whether the risk of an increased debt burden outweigh an improvement in growth," she wrote in a note to clients, alluding to the likely effects of more aggressive monetary stimulus. "We would argue they do."
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