Positive performance: A woman walks past a securities firm in Tokyo. The Japanese currency has been buoyed by an unwind of carry trades and still heavy speculative short positioning. — Bloomberg
TOKYO: Signs of an inflection point for the yen are mounting amid growing expectations that the interest rate gap between Japan and the United States is finally set to shrink.
The currency rallied 1% yesterday as it extended its sharp rebound over the last two weeks from its lowest level against the dollar since the 1980s.
The advance has been spurred on by Japan’s apparent intervention to support the yen, a slashing of bets against the currency by hedge funds and the unwinding of global carry trades that have been weighing it down.
Whether the surge that’s roiling markets now proves to be a turning point will likely come down to the decisions of the Bank of Japan (BoJ) and the Federal Reserve (Fed).
Some 90% of BoJ watchers see the risk of it hiking rates on July 31, even if that is not their base-case outcome, and the Fed is facing growing calls to start cutting rates the same day.
“This certainly looks like positions coming off ahead of a possible rate hike in the face of some much better timed intervention,” said Kit Juckes, chief foreign-exchange (forex) strategist at Societe Generale. “These are sizeable moves and this pushes up volatility. And as volatility goes higher, the cost of holding the position gets bigger. So it has the capacity to unravel.”
The yen climbed to 152.33 versus the dollar at 12.16pm in Tokyo, posting its fourth straight day of gains and outperforming all of it Group-of-10 currency peers.
“The yen is buoyed by an unwind of carry trades given heightened risk aversion from a tech sell-off, and still heavy speculative short positioning,” said Wei Liang Chang, macro strategist at DBS Bank Ltd.
“Unease among yen bears is also deepening with Japanese monetary policy possibly tightening soon, in contrast to coming rate cuts by the Fed and the European Central Bank. Further yen strength into the BoJ meeting next week cannot be discounted.”
The recent volatility is unwanted by carry traders, who favour stability as well as Japan’s ultra-low interest rates when they borrow in yen to then invest in currencies with higher yields.
“Two weeks ago, literally everyone was talking about yen-carry trades, but now it looks like people have totally forgotten about it and are unwinding their positions,” said Yusuke Miyairi, forex strategist at Nomura Plc in London.
The yen has recently tended to surge as London trading kicks off, pointing to moves by global investors to unwind carry trades.
Meanwhile, leveraged funds slashed their net short yen positions in the week ending July 16 by the largest amount since March 2011, according to the most recent batch of data from the US Commodity Futures Trading Commission. Asset managers also cut their bets against the yen by the most in a year.
“We think the yen will become a bit more attractive, so we reduced our shorts,” said Andreas Koenig, the London-based head of global FX at Amundi SA, Europe’s largest asset manager.
“We saw intervention in the yen recently, so the uncertainty of holding a short yen position is rising. We also have the argument that the United States might start its easing cycle soon, which could weaken the dollar,” he said in an interview. — Bloomberg
