Yen emerges as top currency wager for fund bets on BoJ shift

Going long on the yen is the biggest currency wager for AMP Capital Investors’s Nader Naeimi. Singapore-based hedge fund Kit Trading Fund started a bet on the yen last week, predicting the currency will appreciate about 10% to 100 per dollar. Options traders are the most bullish on the yen among developed-market currencies.

Japan’s longest stretch of economic growth in two decades is fueling bets the BOJ will join its global peers and begin normalising policy as soon as this year. The central bank cut purchases of longer-maturity bonds last week, prompting speculation it will allow 10-year yields to rise above its current target of around zero percent.

The 10-year yield is at 0.08%, the highest since October.

“A shift in market sentiment on the BOJ could send the yen significantly higher,” said Naeimi, Sydney-based head of a dynamic investment fund at AMP Capital, which oversees about $137bn. “The BOJ has come to the end of the line and there is little else it can and would want to do to ease policy further, outside of aiming for a steeper curve.”

The BOJ has been buying fewer bonds since adopting its yield-curve-control policy in September 2016, when it shifted focus to controlling interest rates instead of asset purchases. In its January 9 operation, the central bank trimmed buying of 10-to-25 year debt by ¥10bn and cut purchases of bonds due in more than 25 years by ¥10bn.

'Inflection point'

While BOJ Governor Haruhiko Kuroda this week reiterated the central bank’s resolve to maintain its stimulus program until inflation reaches its 2% target, investors aren’t convinced.

“We are at or closer to an inflection point in Japan,” said Rajeev De Mello, head of Asian fixed income in Singapore at Schroder Investment Management, which oversees the equivalent of $590bn. “Changes in long-term policy start in the short term, so markets have to read into bond-buying actions as an early warning.”

The yen may strengthen past ¥108/$ should the BOJ move closer to tapering this year, De Mello said. The currency weakened 0.2% on Wednesday to ¥110.64.

Purely technical

Not everyone is convinced the BOJ is about to start withdrawing stimulus.

The BOJ’s decision to cut long-term bond purchases last week was “purely a technical move to stop Japan’s yield curve flattening and does not signal the start of an early exit from stimulus,” said Mansoor Mohi-uddin, head of currency strategy at NatWest Markets in Singapore.

“The BOJ will only consider tightening monetary policy formally when it sees more evidence of firmer core inflation in Japan.”

The yen will weaken to a range of 115 to 120 per dollar this year as the Federal Reserve is set to raise interest rates every quarter, while the BOJ refrains from tweaking its yield-curve-control policy, Mohi-uddin said.

Market positioning remains negative. Leveraged funds boosted bearish net yen wagers to 100 432 contracts in the week ended January 9, near a 10-year high of 118,526 reached in November, according to data from the Commodity Futures Trading Commission.

Amundi SA, Europe’s largest asset manager, holds a “very tactical” position in the yen as the currency is set to trade in a range, said James Kwok, head of currency management in London. While the currency will likely strengthen past 108 per dollar on the expectation Japan will tighten this year, the Fed and BOJ will be in “the same policy direction,” he said.

Markets remain on high alert for any insight into how and when central banks intend to withdraw the emergency stimulus they adopted following the financial crisis, almost five years after the Fed sparked the so-called taper tantrum.

The euro surged to a three-year high this week after European Central Bank policy makers said they’re open to tweaking policy guidance to align it with a strengthening economy.

“As we have seen with the euro, as soon as the market gets a sniff of a new policy direction they position for it,” said  Keith Dack, a hedge-fund manager at Kit Trading Fund in Singapore. “It does feel like this is starting to be the case with the yen as well, especially given overall market short yen positioning and the weaker dollar.”