Yen May Falls to 110 and Rebounds to 100 on Trump Risks as Demand Rises

Japan’s currency slid Tuesday to the lowest level since June 2 against the greenback, after the extra yield 10-year U.S. government bonds offer over similar-dated Japanese notes jumped this week to the highest in almost three years.

The dollar’s climb from 101 yen to 109 yen in less than a week also was rapid enough to signal that the pace of gains was excessive, the first time that’s happened this year. The greenback jumped 4 percent this month to 109.03 yen on Wednesday.

The yen’s drop since Oct. 31, the largest among 10 major developed peers, has trimmed its advance in 2016 to 10 percent. That remains the strongest performance across the group.

The yen’s swoon after Donald Trump’s shock election win has turned the developed world’s strongest currency into its weakest performer.

Japan’s currency is poised to rally because Trump’s policies will spur political risk, reviving demand for the yen as a haven. The recent rout in Treasuries may also drive Japanese investors back to local bonds. A more “logical level” is around 100 yen per dollar, about 9 percent stronger than where it is now. That view compares with the median forecast in a Bloomberg poll for the currency to strengthen to 105 by mid-2017.

The dollar’s rally after a Trump victory confounded forecasts that such a shock result would spur gains for currencies seen as offering safety, such as the yen, the euro and the Swiss franc. Instead, speculation the new president will boost spending and quicken inflation, pushing the Federal Reserve to raise interest rates, spurred the steepest selloff in Treasuries since 2009. That surge in U.S. yields saw a gauge of the greenback rise by the most in five years last week.

The yen so far is only trading on the positive of the interest-rate differential and not the negative of the risk-asset selloff, which is focused on stocks and selective emerging markets. The dollar-yen will have a very violent correction.

The global debt market selloff on Trump’s election last week wiped a record $1.2 trillion off the value of bonds around the world and took the benchmark 10-year U.S. bond yield to its highest closing level this year. The rout that put global bonds on track for their worst month in 13 years paused Tuesday with a technical indicator showing 10-year Treasuries were the most oversold Monday in 26 years.