(Bloomberg) -- Traders hoping for more volatility in the yen next year are likely to be disappointed. But bulls can take solace in the currency’s upward bias amid a narrowing in the interest rate differential between the U.S. and Japan.
That’s the view of analysts in Tokyo, who expect trading versus the dollar to be confined to a 10-yen range in 2020, with the topside capped at about 101. The pair traded at 109.37 at the open in Tokyo on Friday.
The currency has swung less than 8 yen per dollar since January, the least for any year in data going back five decades. With the outlook for global trade improving on a partial deal between the U.S. and China, a key gauge of volatility in dollar-yen sank to a record low this week.
“Strength in both the yen and the dollar has made the pair immobile, but next year may see a bit more life, with a shift in the balance between the two,” said Minori Uchida, the head of global market research at MUFG Bank Ltd. in Tokyo. He sees the yen strengthening slowly but steadily each quarter in 2020 and ending the year at 104 to the dollar.
Fiscal stimulus from Prime Minister Shinzo Abe’s government takes some of the pressure off the Bank of Japan to ease monetary policy further next year. Meanwhile, speculation of a cut in U.S. interest rates hasn’t gone away, despite upbeat comments from Federal Reserve Chair Jerome Powell.
“The bias is more for a firmer yen,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “The risk isn’t for a higher dollar because U.S. yields are likely to fall on doubts over the sustainability of the country’s 10-year expansion.”
Karakama expects dollar-yen to stick in a 101-111 range over the next 12 months and to close out 2020 at 103. The BOJ would need to end its negative-rate policy to provide a catalyst strong enough for the yen to break out of the range, he said.
The BOJ may tweak its framework in 2020 to make it more sustainable but there are unlikely to be major changes and the central bank will be on guard to curb any excessive drop in yields, according to Tohru Sasaki, head of Japan markets research at JPMorgan Chase (NYSE:JPM) Bank in Tokyo.
While fair value for the pair’s real effective exchange rate is about 90 yen, continued Japanese outbound M&A and foreign investment will keep its advance well short of this level, said Sasaki.
He sees dollar-yen mostly confined to a range of 107-112 before ending 2020 at 110.
Osamu Takashima, chief foreign-exchange strategist at Citigroup (NYSE:C) Global Markets Japan Inc., expects a core range of 105-110.
It would take a clear turn for the worse in U.S.-China trade relations and heightened political risk from the U.S. presidential election to prompt enough of a flight to safety to see dollar-yen test 100, he said.
This leaves the majority view from analysts in Tokyo for a modest appreciation in the yen next year, on top of what is a slim gain so far in 2019 of 0.3%.
