There are 110 reasons why foreign exchange traders should be monitoring flows in the dollar/yen market during Tokyo time in coming weeks. That’s because “more than half of Japan's major companies are assuming an exchange rate of 110 yen to the dollar for the year ending March 2017,” according to the Nikkei Asian Review which surveyed 360 companies. With the survey showing 52 per cent of respondents had assumed 110 for the 2016 financial year that began on 1 April, that level for dollar/yen becomes increasingly important. In simple terms, if Japan’s exporters can sell dollars against yen at levels above 110, it is beneficial to their profits.
If the exchange rate falls below 110 and continues lower, it is to their detriment. When the exchange rate hovers around 110, Japanese exporters will be tempted to lock in some hedges by selling dollars against yen at or just above that level but may hold back from doing too much in the hope that the pair rises further and they get even better levels to sell. If the dollar drops back below 110 and keeps falling, those same Japanese exporters are left in a quandary, unwilling to lock in forex losses by selling below 110, but also facing the inescapable fact that every day the volume of dollars accruing through overseas sales continues to build. If the dollar keeps dropping there comes a point when even the most stubborn Japanese exporter would have to sell greenbacks for yen. Currency traders who have a sense of what Japan’s exporters might be doing have a big advantage over those who don’t given the disproportionate influence those exporters exercise in the dollar/yen market particularly in Tokyo-time. In that sense too, 110 really matters right now.
by Neal Kimberley, Currency Analyst