Yen hits seven-month high; traders mull over sea-change for embattled currency

SINGAPORE/LONDON/TOKYO – The yen surged to a seven-month high on Sept 7, as traders appeared to reassess their outlook on the long-embattled currency, driven by bets on faster Bank of Japan (BOJ) tightening and expectations that Japanese investors may move funds home.

The move reinforces the view of some market watchers that the tide may now be turning for the yen, as a host of factors finally smoke out traders who had spent years betting against the Japanese currency.

The main scheduled event of the week is US inflation data on Sept 11, which will help shape the Federal Reserve’s view on an interest-rate hike later in the month, and, in turn, the direction of the US dollar.

Meanwhile, the European Central Bank will meet on Sept 10, when it is widely expected to raise euro zone rates.

But the focus until then is firmly on the yen. The US dollar slid as much as 1.4 per cent against the Japanese currency on Sept 7 to 154.05, its lowest since February, pushing past the lows struck in August after Washington and Tokyo jointly stepped into markets to prop up the yen, which was at 40-year lows at the time.

Much of the yen strength from that intervention unwound fairly quickly, but new tailwinds from capital repatriation, unwinding carry trades and US political pressure are now giving short speculators cause to rethink their long-term game.

Lee Hardman, senior currency analyst at MUFG, said the break past the 155 level seemed to have reinforced traders’ bullish views on the currency.

“So far this year, when we have seen the yen strengthen following bouts of intervention, that 155 level was where dollar/yen tended to bottom out. Breaking past that level is a bullish signal and we could see further upside for the yen,” he said.

Recent moves have been dramatic; the US dollar traded above 160 yen as recently as Sept 1.

“We could be getting to a tipping point,” Hardman said. “The market had seen it as a one-way trade, that the yen would continue to weaken. But we’re starting to see the first signs that, with the Bank of Japan picking up the speed of rate hikes, that’s starting to have an effect.”

The euro also dropped 1 per cent against the yen to 179.5.

Change in tide

The dollar’s fall against the yen also knocked the currency a little more broadly. The euro rose 0.1 per cent to US$1.1621, while the pound gained a similar amount to US$1.3534.

Traders are pricing a roughly 57 per cent chance the Federal Reserve will hike rates later in September in the wake of Sept 4’s forecast-beating non-farm payrolls report, with much now depending on this week’s inflation data.

“A hot CPI print would all but seal a September hike and underpin a firmer US dollar. A cooler reading would strengthen the case for a hold and leave the US dollar vulnerable to a dovish Fed repricing,” said Elias Haddad, global head of markets strategy at BBH.

“Even if a September Fed hike becomes a done deal, we doubt the US dollar will make new cyclical highs. Tightening by other major central banks limits policy divergence.”

Markets are pricing in a 75 per cent chance the BOJ will raise rates a quarter point at its meeting on Sept 18, with a 60 per cent probability of another move by December.

The Japanese currency surged more than 2 per cent last week, following a confluence of factors, including the unwinding of carry trades and expectations of capital repatriation that would boost the yen.

Eric Robertsen, global head of research and chief strategist at Standard Chartered, said that while carry trades have been among the strongest macro performers year to date despite a surge in borrowing costs globally, the “recent burst” of yen strength is a “potential threat to carry outperformance”.

“If the JPY were to strengthen persistently, this may signal that the increase in JPY and USD rates is starting to trigger a change in asset allocation,” he said.

But sustained yen appreciation is not yet a done deal.

Positioning data on Sept 4 showed that speculators added to their bearish positions in the yen for a third time in a row in the week to Sept 1. Investors now hold a net short position – one that assumes the yen will weaken – worth US$7.198 billion (S$9.11 billion), up from a five-month low of US$3.03 billion in early August.

A larger short position means there is more room for traders to buy the yen if they believe a real shift in fundamentals is coming. But it also reflects a lack of conviction that this is genuinely the case.

Masayuki Nakajima, senior fixed-income and currency strategist at Mizuho EMEA, said that “it may be premature to conclude that the structural drivers of yen weakness have fundamentally changed”.

He said there was still considerable uncertainty over whether the BOJ will raise rates as much as markets expect, and that while speculation around Japan’s giant pension fund GPIF repatriating assets has intensified, the most likely outcome was a gradual increase in domestic bond exposure, not a large-scale and immediate overhaul to asset allocation. REUTERS