Hedge funds were once again caught off guard by Japan’s volatile yen, as the currency sank after traders turned less bearish.
(Bloomberg) — Hedge funds were once again caught off guard by Japan’s volatile yen, as the currency sank after traders turned less bearish.
Leveraged funds cut net yen short positions by 10,574 contracts as of March 28 from a week ago, the most since November, only to see the currency weaken about 2% thereafter. They had added bearish wagers in mid-March, just as the yen rallied. That’s been a recurring pattern since the start of the year, where a sizable change in bearish yen bets by hedge funds was followed by an opposite move in the currency.
The yen slid in the first quarter even amid growing speculation that the Federal Reserve may pause rate hikes and the Bank of Japan may lift its cap on 10-year yields. The currency is being weighed by the nation’s trade balance, which went into a deficit in mid-2021. The latest surprise oil production cut by OPEC+ is likely to aggravate the shortfall.
“There’s less support for the yen than in the past because the trade balance has been in deficit almost constantly,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “Higher oil prices should increase deficits and further remove any support for the yen.”
The Japanese currency dropped as much as 0.7% on Monday to 133.76 per dollar, the weakest in two weeks.
Traders had also been betting that the biggest wage hikes in decades won by Japanese unions amid historic levels of inflation could prompt the BOJ to unwind its massive stimulus, which would lift the yen from a three-decade low reached in October.
“That’s going to nudge the Bank of Japan to a significant overhaul of its yield-curve-control program as early as April,” Homin Lee, an Asia macro strategist at Lombard Odier, said in an interview with Bloomberg Television, referring to the wage increase. “At some point we are going to reach the peak rate in the US. If you combine the two factors together, we still think given where the valuation is for the yen, there’s certainly a significant scope for the yen to appreciate against the dollar.”
Still there are others who think Japan’s economy isn’t strong enough for the central bank to steer toward policy normalization. The BOJ’s quarterly data showed on Monday that confidence among the nation’s large manufacturers deteriorated for five straight quarters.
“The US is still not changing its course for rate cuts although they may pause and moderate the pace of tightening,” said Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “The BOJ, on the other hand, may tweak or abolish the yield-curve control but it’s not yet at the stage of changing the negative interest-rate policy, leaving the absolute yield gap wide between the two nations.”
–With assistance from Shery Ahn and Haidi Lun.
(Updates with yen prices in 2nd and 5th paragraphs.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.