April 9, 2013 / 11:18 AM / 5 years ago

Bold BOJ moves prompt hasty dollar/yen forecast revamp

* Aggressive BOJ easing steps catch analysts off-guard

* HSBC, Credit Suisse, RBS lift dollar/yen forecasts

* Many strategists see scope for further revision higher

By Nia Williams

LONDON, April 9 (Reuters) - Ultra-aggressive monetary easing by the Bank of Japan has taken the foreign exchange market by surprise, prompting some analysts to hastily revise their dollar/yen forecasts higher.

Within hours of the BOJ unveiling radical steps last Thursday to help lift the Japanese economy out of deflation, HSBC boosted its quarter-end forecast to 95 from 90 yen.

Credit Suisse revised its three-month price prediction up to 105 from 100 yen, characterising the BOJ move in a client note as a “bold foray into uncharted waters”.

Others took a more wait-and-see approach despite seeing the biggest one-week move in dollar/yen since December 2011 after the BOJ detailed a plan that Japanese Finance Minister Taro Aso said took monetary policy to a new dimension.

Many top banks, wary of chasing the spot price, made no immediate change to their forecasts.

Royal Bank of Scotland followed suit on Monday, lifting its year-end forecast to 110 from 100 yen, although its strategists left their second-quarter forecast of 99 yen unchanged.

Even with dollar/yen topping 99 on Tuesday, some banks were sticking with forecasts made before the BOJ’s move.

The BOJ unleashed the world’s most intense burst of monetary stimulus with plans to pump about $1.4 trillion yen into the economy and nearly double the monetary base in less than two years in a bid to beat deflation.

Even strategists who correctly predicted the central bank would fulfil expectations of bold policy steps were caught off-guard by the scale of the easing measures, and the pace of the yen’s subsequent tumble.

“This is not a BOJ that’s just following the playbook of (U.S. Federal Reserve Chairman Ben) Bernanke. The scale goes above and beyond anything that has been done elsewhere. The doubling of the money base within two years - that’s huge,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank in New York.

“In light of this we will be considering whether our longer-term forecasts of 100 and 110 for dollar/yen at the end of 2013 and 2014 respectively, are too cautious.”

The dollar hit a near four-year peak of 99.67 yen on Tuesday, having soared more than 7 percent in just four days

It raced past the mean three-month and end-second-quarter forecast from the 10 biggest banks in the FX market, which was 98.5 yen.

That means analysts who previously thought 100 yen was an unrealistic short-term target for the dollar are rapidly reassessing.

Strategists at UBS, among the most dollar-negative of the top 10 FX banks with a three-month dollar/yen forecast of 95 yen, stressed their prediction had been made before the BOJ announcement.

“Clearly 95 yen looks conservative now. It would be fair to say we believe there’s a very good chance we will go above 100 yen quite soon,” said Beat Siegenthaler, FX strategist at UBS.


Even those analysts who are content to keep forecasts unchanged recognise the risk of the dollar’s surge leaving previous price predictions looking outdated.

Morgan Stanley have a forecast of 100 yen for the end of the second quarter, but strategist Ian Stannard said there was an increasing risk of the dollar overshooting, and of their year-end forecast of 105 yen being hit early as well.

Despite that, the bank was in no rush to revise higher.

“I am always reluctant to take a knee-jerk reaction. This is what we were expecting - it’s been more aggressive but things are unfolding the way we were anticipating so we will continue to watch these developments,” Stannard said.

If yield-seeking Japanese investors decide to use the flood of new money to buy assets abroad the yen could slide further, although many strategists expected the dollar to encounter tough, if temporary, resistance around 100 yen.

Analysts will also look for hints on how far the Japanese authorities are prepared to let the yen depreciate in their bid to fulfil their goal of 2 percent inflation in the economy.

“It’s not difficult to come up with numbers like 110 or 120 yen as the kind of exchange rate that will be consistent with inflation nearer 2 percent,” Deutsche Bank’s Ruskin said.

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