Betting against the yen ranks high among currency traders.
The yen was at its weakest level against the dollar in nearly four months on Tuesday and has slipped 4.75 per cent over the past 18 trading days. Positioning data shows traders selling, or shorting, the yen at levels not seen since the start of January.
Investors do not need to look far to explain yen weakness. While the Federal Reserve contemplates its fourth rate rise since December, the Bank of Canada prepares to increase rates, the Bank of England engages in a full-throttle debate about monetary policy and other G10 central banks consider similar moves, Japan’s policymakers remain steadfastly wedded to quantitative easing.
Underlining this position, the BoJ on Friday stepped up its unconventional monetary policy, saying it would buy an unlimited amount of 10-year Japanese government bonds. It remains determined to keep 10-year JGB yields as close to zero as possible, thereby widening the spread in yields between Japan and other countries.
“The Bank of Japan looks likely to be the only major central bank that will not raise its interest rates this year,” says Yann Quelenn at the online bank Swissquote. “This is one great reason why investors are staying away from the JPY.”
Hence, forex analysts’ trading recommendations invariably gravitate towards buying a G10 currency, indeed almost any G10 currency, against the yen.
Since the central banks’ gathering in Sintra two weeks ago, which sparked a bond sell-off in anticipation of a co-ordinated retreat from QE, G10 currencies have logged impressive gains against the yen. The Swedish krone has risen 5.4 per cent, the Canadian dollar 4.8 per cent and the euro 4.2 per cent.
These moves are the latest in an ongoing period of yen weakness stretching back 12 months, during which the currency has declined by double-digit percentage points against the currencies of all its G10 partners — even sterling.
The election of Donald Trump in November sparked the first phase of broad yen selling as investors anticipated a stronger US economy.
Derek Halpenny, forex analyst at MUFG says: “Now we are seeing yen weakness from another side, the rest of the world, as the yen comes up against the euro, the Canadian dollar, sterling and others.’’
Investors wondering when this ends have plenty of choices, although none of them appear particularly convincing. They might look out for the next bout of market risk aversion, periods when the yen tends to act as a haven asset.
There are enough geopolitical squalls on the horizon, such as Gulf tensions, North Korean missile tests and US political uncertainty. But thus far that has not spurred serious risk-off behaviour that tends to drive the yen higher on bolthole buying.
Rising yields could also fan risk-off conditions if they force a retreat in equities and trigger a sharp rise in broader market volatility.
Also, the BoJ might yet have a change of heart. After years of chronically low prices, annual core inflation is rising, as are wages growth and land prices, says BNY Mellon’s Neil Mellor.
The BoJ does not need to consider whether its long-term strategy of eradicating deflation is in sight, but further data surprises may well challenge “the interminable low inflation story”, says Mr Mellor.
More likely to influence the yen is Japanese politics. Next year sees a trio of calendar events — the end of BoJ governor Haruhiko Kuroda’s term of office in April, the finale of prime minister’s Shinzo Abe’s three-year term as Liberal Democratic party leader in the autumn, and a general election, which has to be held by the end of 2018.
Mr Abe is languishing in the polls, and if his ratings fail to recover, investors will begin to question the future of Abenomics, his famed economic policy.
“The failure of Abenomics would strengthen the yen, because it would place a question on monetary policy,” says Mr Halpenny.
Those events look pretty distant. For now, the yen looks like a sell — and a pretty widespread one.