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Dollar-yen’s decisive break past 100 may hinge on 3 events

Tuesday, 3 Sep 2013 | 3:28 AM ET
Sha Ying | CNBC

Speculation over dollar-yen is once again doing the rounds, after the Japanese currency fell to one-month lows against the U.S. dollar, sparking talk that another crack beyond 100 is imminent.

Dollar-yen hovered at 99.68 on Tuesday in Asia's session, after brushing 99.705 in U.S trade overnight, boosted by easing fears over Syria and reports that Japanese policy makers could be set to push through their planned sales tax hike.

(Read more: Is the best trade of 2013 losing its luster?)

Still, analysts say it's still premature to see a decisive break above the psychologically-important level. According to David Forrester, forex strategist at Macquarie, a sustained move by dollar-yen above 100 hinges on three events.

"We will need to see the VAT [sales tax] increase as scheduled in Japan, the Bank of Japan increasing its asset purchases and U.S. yields head higher. These three factors would ensure a divergence in U.S. and Japanese monetary policy," said Forrester, who has a forecast for dollar-yen to reach 110 by year-end.

The currency pair has crossed the 100-level several times since May, but each time failed to sustain the momentum.

(Read more: Hiking Japan's sales tax: why it's now or never)

Speculation over whether Prime Minister Shinzo Abe is having doubts about a scheduled consumption tax hike, broadly seen as an essential part of reducing the country's substantial fiscal deficit, has been a key driver of yen strength in recent times.

This is because the Bank of Japan has said in the past that if it is to push ahead with its aggressive easing program, a move that would lead to yen weakness, it would need to see evidence of real efforts to reduce the fiscal deficit.

Yen to hit 105 in 3 to 6 months: Pro
Lutfey Siddiqi, Managing Director, FX Asia Pacific at UBS Investment Bank says that the yen will weaken and hit 105 against the greenback in 3 to 6 months.

So it's no wonder that reports this week suggesting that Abe is set to go ahead with the tax hike has been instrumental in the yen's move lower, analysts said.

On Tuesday, Finance Minister Taro Aso said Japan will tell G20 nations at a summit this week that it will proceed with a planned two-stage sales tax hike, and consider compiling an extra budget for fiscal spending to ease the pain on the economy.

(Read more: Here's what could really knock the yen back down)

"After months of the dollar yen seemingly going nowhere, it does seem like it's finally found some momentum again," Callum Henderson, global head of FX research at Standard Chartered said.

Todd Elmer, currency strategist at Citi, said dollar-yen could also get a boost if the U.S. jobs report on Friday surprises on the upside.

"I do think there is some upside for the dollar-yen if the U.S. economy accelerates in line with our expectations then that might push it higher," Todd Elmer, currency strategist at Citi told CNBC's Asia Squawk Box on Tuesday.

(Read more: Is Kuroda too 'in love' with his own policies?)

But he agrees a sustained strength would rest on more moves from the Japanese central bank.

"I think we will have to wait for the next round of easing from the Bank of Japan before we see a real push into unchartered territory," he added.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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