(Bloomberg) -- The yen is likely to strengthen about 7% over “the next few weeks” amid signs that the Bank of Japan is poised to increase its cap on benchmark bond yields at its upcoming meeting, according to Societe Generale SA.
Core Japanese inflation reached a more than four-decade high of 4.1% in April, putting pressure on BOJ Governor Kazuo Ueda to boost rates in an effort to tame rising prices, SocGen’s Olivier Korber wrote in a note to clients. At the same time, dovish comments by Federal Reserve Chair Jerome Powell suggest the US central bank is set to pause its interest-rate hiking cycle for the time being.
Korber expects the BOJ to lift the top of its yield-curve control range for 10-year bonds by 50 basis points to 1% at its June 16 meeting, a shift that could push the yen toward the 130 per dollar level, from about 139 Wednesday. To profit, he recommends investors buy inexpensive two-month digital put options with a strike price of 134 per dollar and a knock-out barrier at 129.
“Hawkish Fed speakers are mitigated by Powell saying that tight credit means rates may not need to rise as much, suggesting the dollar could run out of steam soon,” Korber wrote. “Short-term risks of a stronger yen are increasing the possibility of a move towards 130 in the next few weeks.”
Still, Ueda has hinted in recent days that faster inflation isn’t changing the BOJ’s view, saying that the cost of making hasty policy changes would be “extremely high.”
--With assistance from Robert Fullem.
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