Investors get their best chance to answer the question “Who is Kazuo Ueda?” on Friday, when the Bank of Japan governor nominee faces his first grilling in parliament.
(Bloomberg) — Investors get their best chance to answer the question “Who is Kazuo Ueda?” on Friday, when the Bank of Japan governor nominee faces his first grilling in parliament.
From a rise in bullish bets on the yen to wagers on the end of yield-curve control, traders have been positioning for an Ueda-led BOJ since news of his surprise nomination broke earlier this month. But consensus has yet to form on how hawkish or dovish the former central bank board member is, suggesting the potential for market moves as he answers questions from lawmakers.
The Japanese currency fell to its weakest level of the year versus the dollar on Thursday before paring losses.
What to Look for During Hearings for BOJ Nominee Kazuo Ueda
Here’s a brief look at some of the current market positioning:
Yen Positioning
A Citigroup Inc. gauge of trader positioning suggests they have been trimming yen shorts over the past two months and have almost squared their position. Japan’s currency has strengthened about 13% since touching a three-decade low in October, boosted in part by the BOJ’s surprise December decision to double the ceiling for 10-year yields which spurred speculation of a further policy shift.
A divergence in the spot and options markets for the dollar-yen pair also suggests traders are looking to position for possible hawkish signals from Ueda. Strategists see Japan’s currency appreciating to 124 per dollar by year-end, from around 134.50 on Friday.
Currency Options
One-week implied volatility for the yen is higher than peers, suggesting some caution from traders that Ueda’s comments may trigger currency moves, but expected price swings are well below levels reached before the BOJ meeting in January. Ueda will face a hearing in the lower house of the parliament on Friday, followed by another in the upper house on Monday.
“Markets are perhaps coming to grips with the fact that accommodation will likely be removed this year no matter who becomes the next BOJ governor,” Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note.
Bond Futures
Bond investors also have a busy schedule ahead and the expiration of the March contract of 10-year bond futures will come between Kuroda’s last policy meeting and Ueda’s first. The spread between the front- and second-month contracts remains near the widest level since 2008, suggesting some investors are rolling over their short bets.
Investment trusts and trust banks — which typically hold and trade investor assets on their behalf as custodians — have been mostly net sellers of the futures since November, exchange data show.
“JGB bear funds will roll over their short positions as they are likely to remain in demand from local institutional and retail investors,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities Co. in Tokyo. “There is a lot of uncertainty, but we may see a large drop in the June contract relative to the March contract.”
These so-called bear funds, such as Nomura Asset Management Co.’s Super Bond Bear Open Four, typically take short positions in government bond futures so that their net asset value and bond prices move in the opposite directions.
–With assistance from Vassilis Karamanis.
(Updates yen level.)
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