Higher yields: People walk past an electronic stock board displaying Japan’s Nikkei 225 index at a securities firm in Tokyo. The yen is now the lowest implied yield of the 31 currencies analysed by Bloomberg. — AP
TOKYO: The yen is regaining its place as the most attractive option for carry traders to fund their purchases of higher-yielding currencies.
The Japanese currency now has the lowest implied yield of the 31 currencies analysed by Bloomberg, having been in fifth place a year ago.
Other currency yields have risen amid the wave of global monetary tightening, while the yen’s has remained static with the Bank of Japan (BoJ) steadfastly sticking to its negative rate policy.
In a carry trade strategy, investors take advantage of a difference in interest rates between two economies to borrow where the rate is low and invest where it’s high. The yield implied by the yen’s three-month forwards stood at minus 0.3% last Friday, the lowest among currencies in the analysis.
“The yen has no competitor now as a funding currency,” said Hideki Shibata, a senior rates and currencies strategist at Tokai Tokyo Research Institute.
“There are enough yield differentials, and the market will eventually realise that they won’t narrow substantially anytime soon.”
Carry trades continue to be a bright spot in the rates market, with the Bloomberg GSAM FX Carry Index up about 1.7% this year after surging 8% in 2022.
Conversely, a gauge of the global bond market has risen less than 1%, having slumped a record 16% last year.
The euro and Swiss franc, which used to be the other common sources of carry funding, have seen their implied yields surge after the European Central Bank started policy tightening last July and its Swiss counterpart ended its negative-rate policy in September.
“While the yield on the Taiwanese dollar remains around zero, its limited liquidity makes the currency less than ideal as a funding source compared to the yen,” Shibata said.
On the buying front, carry traders have plenty to choose from. The US, New Zealand and Canadian dollars offer a three-month yield of more than 4%, and some emerging market currencies, such as the Hungarian forint, Brazilian real and Mexican peso, have a yield of as high as almost 17%.
Still, carry traders may be reluctant to use the yen as a funding source given expectations for a BoJ policy tweak that may propel the currency higher. The central bank’s management is set to undergo a major shift with economist Kazuo Ueda expected to become its next governor in April.
But while some investors expect Ueda to end the BoJ’s negative-rate policy, such a move wouldn’t necessarily be enough to widen the yield differentials between Japan and other nations.
And his voting record as a former BoJ board member against ending zero rates in 2000, as well as his recent remarks on the need for monetary easing, suggest Ueda will be slow to hike.
Strategists seem to be warming up to the yen’s funding potential. A Goldman Sachs Group Inc team, including Kamakshya Trivedi, tipped the currency to emerging market carry traders in a recent note should economic growth beat expectations.
“The yen could be the best funder in a world of positive growth surprises and rising US yields,” they wrote.
Furthermore, a changing relationship between the yen, bonds and stocks is making it a more “efficient” funding currency, according to Adam Cole, chief currency strategist at RBC Capital Markets.
The Japanese currency is not trading any more like the safe haven it once was, removing a historic inefficiency for carry traders, he noted in a recent report.
“If that is no longer the case, does this mean that the yen is becoming a choice funding currency?” he asked. “The answer is a qualified, yes.” — Bloomberg
