Merrill Lynch: Japanese Yen Expected To Weaken

The Japanese Yen has been steadily weakening against most major rivals this week and analysts say it can be attributed to a variety of things, among them a move by investors into higher risk currencies and the unwinding of long positions in the currency.The former won't come as any surprise to the research analysts from Merrill Lynch.  According to a recently issued report from Merrill Lynch the Japanese Yen is over-valued against major currencies.

They base this conclusion on a study of interest rate differentials, and suggest that, over the medium term, the currency is likely to weaken. It has been shown that USD/JPY typically closely follows U.S.-Japan interest rate differentials, most especially in the 2-year sector.  To some extent, this is because higher U.S. rates are attractive to carry trade.

Given all that, Merrill Lynch now advises that investors consider short Yen positions versus a 2-year U.S. Dollar rate (beta-weighted basis).   Merrill Lynch notes that such a trade would be consistent with their core call for a gradual weakening of the Japanese currency, and lower front-end U.S. interest rates over the medium term.

In Asian trading today, and with Japanese markets closed in celebration of a national holiday, the Japanese Yen slipped to a 1-month low against the U.S. Dollar.  Currently, USD/JPY is trading at 83.4850; on the eToro , among traders of USD/JPY, the sentiment is bullish with a ratio of 3 to 1 in favor of buying.  GBP/JPY is trading at 134.1342; on the eToro trading floor, the sentiment is significantly bullish with a ratio of 5 to 1 in favor of buying.

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