Next stop for dollar-yen: 120?
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Dollar-yen rocketed to a seven-year high after the Bank of Japan stunned markets by expanding its quantitative easing program on Friday, and strategists say the pair has "a lot further to go."
The U.S. dollar rose 0.4 percent to 112.76 yen on Monday, extending Friday's near 3 percent rally, leading many strategists to recalibrate their outlook for the pair.
Khoon Goh, senior FX strategist at ANZ says dollar-yen could touch 115 by year-end and rise to 120 in 2015. Before the BoJ announcement, he didn't expect the pair to reach 115 until 2016.
"The BoJ has made it clear that it is prepared to do whatever it takes. This opens up the possibility that they could to more if needed, which would put further upward pressure on dollar-yen," said Goh.
After announcing an expansion of its stimulus program on Friday, the BoJ said it would continue easing as long as needed to achieve stable 2 percent inflation, reinforcing its commitment to reflating the world's third largest economy.
Another driver for the dollar-yen trade will be the $1.2 trillion Government Pension Investment Fund's (GPIF) new asset allocation targets, he said.
On Friday, the country's biggest pension fund said it plans to cut holdings of domestic bonds and raise investments in stocks. Under the new allocation guidelines, Japanese stocks and foreign stocks will account for 25 percent of the fund's holdings, up from 12 percent each previously. The fund will put 35 percent of its money in domestic bonds, down from 60 percent, while the ratio for overseas bonds will rise to 15 percent from 11 percent.
"An increase in allocation to overseas stocks and bonds should see further yen selling," said Goh.
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