As The Yen Crashes, Here's Why "The Move Is Just Getting Started"

One of the biggest moves across asset classes in the aftermath of the Trump presidency, has been the Yen, which since last Wednesday's panic lows has now seen a nearly 8% drop in less than a week: by comparison, it took the USDJPY substantially longer to rise by a similar magnitude following the BOJ's announcement of the QQE expansion in November 2014, suggesting that when it comes to monetary policy, Trump has had a greater impact on Japan's economy than QE and the BOJ's printing of trillions of yen (we doubt Trump has gotten a thank you note from either Abe or Kuroda).

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And while the Dollar-Yen pair is now massively overbought by virtually every metric, the move is set to extend according to Richard Breslow, a former FX trader and fund manager who writes for Bloomberg.

Here are Breslow's arguments why the "USDJPY move is just getting started."

While some consolidation in U.S. yields is perhaps overdue, it’s very unlikely they’ve peaked on a long term basis. This has severe consequences for currency markets; most notably USD/JPY.

The power of the correction in U.S. Treasuries has been breathtaking: 10-year yields climbing more than 40 basis points in just three trading sessions. And yet, they’ve only just recovered to levels seen at the start of 2016, despite the outlook being completely transformed since then.

Remember that the drumbeat of improving U.S. and global data that preceded the election was already starting to put upward pressure on yields -- the rate on the 10-year added 23 basis points in October, a third month of advance, and the two-year yield climbed eight basis points.

Even allowing for structural headwinds, the new administration’s proposed policies will generate faster inflation. An expanding fiscal deficit will equate to an increased supply of Treasuries. Both drivers will see the curve steepen.

Real yields in the U.S. remain remarkably negative which will become even more anomalous, and need to change, as fiscal stimulus replaces monetary policy as the primary government support for growth.

With elevated volatility and uncertainty, risk-premiums on most assets will rise -– including Treasuries.

All these inputs would suggest the dollar itself has more room to climb. And the currency that might suffer the most over the long term is the yen.

Japan’s extraordinarily easy monetary policy will become a greater differentiator as U.S. real yields climb.

Japan’s massive debt burden will be increasingly more difficult to fund as risk-premiums rise. On the other hand, stagnant growth can’t cope with higher yields. Ultimately, the outlet for these contradictions will be yen depreciation.

At the same time, as a commodity importer, Japan’s terms-of- trade are being squeezed. And as the details of yesterday’s GDP figures underscored, it’s an economy heavily dependent on exports that will suffer from any move toward protectionist policies globally.

While U.S. yields are now back at January levels, USD/JPY remains 10% lower. Recent developments suggest that it will be the currency pair, rather than yields, that has more potential to overshoot during the year ahead.

USD/JPY is trading about 7% higher than last Wednesday’s panic low. Such a pace is clearly unsustainable, and like Treasuries, the pair may be due a period of consolidation. But it’ll just be a temporary breather rather than the end of the race higher.