According to Bloomberg, the yen has weakened more than 5% against the dollar since August 5, driven by a combination of hawkish Japanese monetary policy, concerns around US earnings, and a weak jobs report. This has led to a resurgence in yen-centered carry trades, where investors borrow yen to invest in higher-yielding assets elsewhere. Nomura Holdings Inc., Japan’s largest brokerage, has observed a variety of investors, including corporate clients and hedge funds, returning to this strategy. The appeal of borrowing cheaply in yen is amplified by higher yields in other parts of the world, especially after US retail sales data led to a rise in US bond yields, reducing expectations for Federal Reserve interest-rate cuts this year.
The yen gained on Friday, paring its worst weekly drop in almost two months, down more than 1% against the dollar. ATFX Global Markets, an Australian online forex broker, reported a 30% to 40% increase in yen shorts over the past week, driven largely by hedge funds and high net worth investors. The key question for investors is whether the Bank of Japan (BOJ) will hike interest rates again this year. If the BOJ maintains its current stance, the allure of carry trades is expected to grow. Traders are looking for further clarity from BOJ Governor Kazuo Ueda, who is scheduled to speak this coming week. If Ueda sounds dovish while US Federal Reserve Chair Jerome Powell appears hawkish, the interest rate differences between the US and Japan could remain elevated, enticing more investors into carry trades.
Among those shorting the yen is a hedge fund managed by Yeoh, who entered a bearish yen trade against the pound earlier this week. The fund aims to ride the trend back to pre-BOJ levels if volatility continues to settle. The yen has slid to around 148 per dollar since touching 141.70. The fragility of the yen was evident in the latest Commodity Futures Trading Commission data. Even if comments from Ueda and Powell encourage investors to buy dollars for yen, it doesn’t mean they will all rush to do so. M&G Investment Management, which has reduced some bullish positions on the yen, notes that while the currency is undervalued, it might remain so for some time. Japan’s currency “is really cheap, but we’re not foolish enough to think that it is going to ping back down to fair value anytime soon,” said a representative from M&G Investment Management.
