Expect yen to outperform dollar in few months: Henderson

Callum Henderson, Head - Currency Strategy at Standard Chartered Bank comments on what's happening to yen and the US housing retail sales numbers that came out.

Standard Chartered believes that the dollar-Yen will stabilize around current levels and the 115 dollar-yen level will hold.

They see no prospects of BoJ hiking rates in the near term. Also, they believe that the yen is likely to outperform the dollar in the next few months.

Excerpts from CNBC-TV18's exclusive interview with Callum Henderson:

Q: The yen is at about 115.9 right now, how much concern have you seen on yen carry trade over the last one month? Could you quantify for the sort of redemption pressures you have seen?

A: We have seen a combination of factors; first of all there has been a spike in Japanese short-term interest rates over the past couple of weeks due to money market tightness ahead of fiscal year-end. So that’s a seasonal thing, but that has obviously exacerbated the unwinding of some of these carry trades as you mentioned.

More importantly, we have seen Japanese repatriation. The fiscal year-end in Japan is on 31st March and that has been the main flow driving yen. Japanese outflows from the home country to foreign, high yielding assets has been the main thing that has been weakening the yen and as some money has gone home to Japan ahead of fiscal year-end, the carry trade has become more vulnerable. You have seen that combination of factors hitting some of these high yielders and also boosting the yen in the very short-term.

We think that dollar-yen will stabilize close to current levels, maybe just above 115 and might have another go at it later today. So we think it will stabilise around current levels and the repatriation will slow over the next week or so and there will continue to be demand for high yielding assets out of Japan given the fact that interest rates remain so low in Japan.

Q: We have done a snap poll of a few treasury heads over here and feeling sseems to be that the 115 level which held last week will perhaps not hold this week. What’s your own view on that?

A: Our view is that it will hold.

Q: What’s the call on the interest rate scenario in Japan right now? We are getting a mixed view - one faction believes that they might just go ahead and raise rates but the data doesn’t support that at this point of time. What sort of impact do you see on the outlook of interest rates on carry trade?

A: That’s the key point. What we are seeing at the moment is flow driven rather than fundamentally driven where we are seeing unwinding of carry trade, Japanese money going home. But we are not seeing reassessment of Japanese policy prospects, we see no prospects of BoJ hiking rates again at least in the near-term.

We do not expect them to hike rates until the Q4 and as you said, the data doesn’t justify any further rate hike for the time being. Inflation is zero and there has been little pass through from a very strong external business sector to the consumer and till we have that there is little prospects of some more rate hikes. Don’t forget that we have elections this year in Japan in July so the BoJ is unlikely to hike the rate in front of those.

Q: What is your medium-term view on the dollar-yen a quarter down the line, and by the end of 2007?

A: In the next quarter, we think that dollar-yen will find a flow close to current levels; maybe a bit below that and gradually growing higher again as the typical pattern running higher and then collapsing.

Over the next year/ two years we think they will be lower because that there will be a fundamental recovery in the yen and the BoJ will hike further but it may take some time and in the short-term Japanese investments outflows in the home country will continue to wane.

Q: Are you concerned about the data that came out from the US overnight in terms of the retail sales?

A: Obviously, retail sales was weaker than most people expected. But that doesn’t mean that the yen will necessarily rally dramatically. It may mean that the yen will outperform against the dollar in the very short-term but we think that outflows from Japan will continue to be a key driver of the yen. As far as the dollar is concerned we do look for more weakness to come over next 3-4 months.