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The dollar-yen trade is back...and could be better than ever

Tuesday, 26 Nov 2013 | 5:51 AM ET
Bloomberg | Getty Images

After going steady for the last few months, the dollar and the yen are about to break up again, according to strategists – with one even predicting that the dollar-yen is on its way to 125.

The Japanese yen moved back above 100 last week for the first time since September and remains at levels not seen since late May. This comes after a furious start to the year with aggressive monetary easing in Japan causing it to depreciate 20 percent against the dollar in just five months.

The dollar-yen is one of the most widely traded currency pairings in the world. Traders try to exploit slight fluctuations in the price by buying and selling the different currencies and by speculating on whether they might go up or down.

(Read more: The dollar bulls are back with a bang)

But analysts are turning bearish again on the yen. Commodities trader Dennis Gartman believes the recent dip in the oil price, after a deal was reached between Iran and six world powers to curb its nuclear program, shows just how weak the yen currently is.

"This news alone should be supportive of the yen, for Japan is of course the nation most seriously exposed to the uncertainties of higher crude prices" he said in a research note on Monday.

"The fundamentals of the Bank of Japan's aggressive expansion of its balance sheet trumps even this fundamental benefit...we are more bearish now than we were previously."

Gartman has a target price of 125 for the dollar-yen, a level it hasn't seen for the last eleven years. Thanos Vamvakidis, head of European G10 foreign exchange strategy at Bank of America Merrill Lynch Global Research is another advocate of the trade, citing a difference in policy between the two central banks.

(Read More: Dollar to tradesideways, taper or no taper: charts)

The U.S. Federal Reserve looks ever more likely to announce that it is moderating its bond-buying at some point in the new year. This would give U.S. investors and reason to bring their dollars home with interest rates expected to eventually rise from record lows.

If US doesn't falter, dollar/yen likely higher: Pro
"Everyone is really focused on U.S. economic performance," explains Boris Schlossberg, BK Asset Management. He discusses which economic factors will move the Japanese yen.

"I like long dollar-yen," Vamvakidis told CNBC Tuesday. "It's a trade that's coming back, expecting that the Bank of Japan (BoJ) will continue to supporting unconventional policy while the Fed is tapering."

Minutes from the Bank of Japan's October meeting released on Monday showed some members saw downside risks to economy, underscoring pessimism within the board on achieving its 2 percent inflation target. This target was made back in in January whilst the BoJ also introduced an open-ended commitment to continue buying assets. This follows a leadership change last year, with new Prime Minister Shinzo Abe openly calling for aggressive monetary stimulus from the country's central bank.

Core consumer prices data for Japan - which are released this Friday – are likely to rise to 0.9 percent in October from a year earlier, according to a Reuters poll. This would mark a fifth straight month of gains and the biggest year-on-year growth since November 2008.

Nonetheless, Credit Suisse believes the fourth quarter of 2013 will be weak for Japanese activity with the benefits of the weaker yen beginning to fade. Thus, it expects the BoJ to continue to push the yen lower in 2014.

(Read More: This week, watch Japan data blitz and India GDP)

In contrast, it said in a research note on Monday that now may be the time for the dollar to push higher.

"We have been bullish on the dollar and now believe that the long-anticipated USD rally could be about to commence," the fixed income research team said. "We remain medium-term bullish Japanese equities and medium-term bearish JPY."

It targets the next tick higher for dollar-yen to be around 103.10, and should then push to around 110.60 afterwards.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

Correction: An earlier version of this story stated the target for yen at $125. It should, in fact, be dollar-yen at 125.

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