As investors brace for U.S. CPI inflation data that could roil financial markets, calls to “sell the yen” are growing louder.
Asia’s biggest banks are almost unanimous in their view that the yen will continue to weaken as traders cut bets on a Federal Reserve rate cut, which supports the dollar and U.S. Treasury yields. Expectations of further yen weakness are encouraging traders to rebuild bearish positions on one of the most vulnerable currencies amid strong U.S. inflation data.
Nick Twidale, chief analyst at Sydney-based ATFX Global Markets, who has been trading the yen for 25 years, said: "Selling the yen is by far the most popular trade. Hedge funds are still profitable in shorting the yen. Given the doubts about the extent of the Fed's rate cuts, investors are more inclined to short the yen at present."
The Japanese yen is the third most traded currency in the world, after the US dollar and the euro, and ample liquidity makes it easy for investors to buy and sell the yen.
The yen has weakened for three straight years as Japan’s relatively low interest rates make it an ideal target for the so-called “carry trade,” in which investors borrow in a low-interest currency to finance purchases of higher-yielding assets elsewhere.
Mizuho Securities, Nomura Securities and Mitsubishi UFJ Bank are among the institutions that say the yen is at risk of weakening to 150 or below, raising the threat of renewed intervention by authorities. The yen’s 4.5 percent depreciation over the past month has put officials and yen traders on high alert.
Yujiro Goto, head of foreign exchange strategy at Nomura Securities in Tokyo, wrote in a research note that if U.S. CPI data is better than expected, the dollar is likely to rise broadly and the yen is also likely to try to return to the 150 level.
The uneasiness from Tokyo is growing. Japan's chief monetary official Jun Mimura told reporters on Monday that he was urgently watching the currency market. Japan's new Finance Minister Katsunobu Kato also said on the same day that sudden fluctuations in the yen would have a negative impact on corporate activities and people's lives.
At present, the selling pressure on the yen comes largely from the expectation of a stronger dollar. David Sokulsky, chief investment officer of Sydney hedge fund Carrara Capital, said, "I think this is not just a yen problem. The answer is simple. The focus is on the dollar, not the yen. The easiest trade is to short the yen."
Economists expect a key measure of U.S. inflation to have eased in September, even as price pressures for some goods, such as used cars, are rising. Expectations for weaker inflation make a positive surprise in the data more likely.
If the CPI data is very strong, the yen "may suddenly fall to the 150 level, but I think it will recover quickly due to caution about intervention," said Tsutomu Soma, a bond and currency trader at Monex Inc. in Tokyo.
In Singapore, hedge fund Blue Edge Advisors is also watching for further yen weakness on the back of U.S. data. Calvin Yeoh, who helps manage the Merlion Fund, said:
“Until all of this positioning disappears or the data turns soft, the path of least resistance (albeit volatile) remains higher U.S. yields, which means a stronger dollar and weaker yen.”
Article forwarded from: Jinshi Data
