Hedge funds are betting on another run of yen weakness, a trade that made money earlier this year for billionaire George Soros, putting them in opposition to economists who see Japan’s currency little changed into 2014.
Futures traders pushed net shorts, or wagers the yen will fall versus the dollar, to the highest since July 2007, according to the Commodity Futures Trading Commission. That contrasts with the median estimate of more than 50 analysts surveyed by Bloomberg, which puts the currency at 102 per dollar at the end of the first quarter of 2014, from 101.47 today.
Japan has resorted to an unprecedented $70 billion of monthly bond purchases since April to depreciate its currency, boost growth and combat deflation. The yen has plunged 15 percent this year, on pace for the biggest drop since 1979.
“Everybody likes dollar-yen higher,” Brad Bechtel, the managing director at Faros Trading LLC in Stamford, Connecticut, said in a Nov. 22 interview. “And everyone has it on.”
The yen fell to as low as 101.92 per dollar yesterday, the weakest level since May, when it slid to a 4 1/2-year low of 103.74. While it gained for the first time in four days today, its decline this year makes it the worst performer after South Africa’s rand among 16 major currencies tracked by Bloomberg.
Soros, 83, made almost $1 billion from November 2012 to February 2013 on bets the yen would tumble, according to a person close to the billionaire’s family office. Michael Vachon, a spokesman for Soros Fund Management LLC, declined to comment.
Soros’s former chief strategist, Stan Druckenmiller, who made $10 billion with Soros in 1992 from a wager that the Bank of England would be forced to devalue the pound, has also been selling the yen. Druckenmiller, the founder of Duquesne Capital Management LLC, said in a Bloomberg interview in September that his firm is “short some yen,” while being “long some Japanese” stocks.
Fortress Macro Fund, which is run by Michael Novogratz and Adam Levinson, made money trading the yen last year when the currency fell 13 percent. Fortress Macro Funds oversee $3.8 billion. Spokesman Gordon Runte couldn’t be reached for comment.
Signs that the Federal Reserve may reduce its $85 billion a month of bond purchases, which pump money into the economy and debase the dollar, are also driving the yen’s plunge versus the U.S. currency. Minutes of the U.S. central bank’s Oct. 29-30 policy meeting showed that Fed officials expected to reduce their stimulus program “in coming months” as the economy improves.
Bank of Japan Governor Haruhiko Kuroda said in Tokyo yesterday that the nation’s target of boosting inflation to 2 percent could be reached in the late 2014 or early 2015 fiscal years. Consumer prices have declined 0.1 percent a year over the past 15 years.
Japan’s central bank doubled its monthly bond purchases in April to more than 7 trillion yen ($69 billion). The purchases form part of an economic policy dubbed Abenomics after Prime Minister Shinzo Abe, which as well as banishing crippling deflation aims for a recovery in economic growth.
Net-short positions in Japan’s currency versus the dollar increased for three straight weeks through Nov. 19, data from the Washington-based CFTC show. The number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain increased to 112,216 contracts, up from 95,107 a week earlier.
Investors should be wary of following the herd, said Alan Ruskin, the New York-based global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG, the world’s biggest currency trader.
“The more it looks like a sure thing, the less it’s a sure thing,” Ruskin said in a Nov. 22 phone interview.
When hedge funds and other futures traders were last this bearish on the yen, in July 2007, it strengthened 3.8 percent, and went on to gain 23 percent the following year, the most since 1987, data compiled by Bloomberg show.
Money is flowing out of Japan, providing headwinds for the currency. Japanese investors bought 349.9 billion yen of foreign bonds during the week ended Nov. 15, according to the Ministry of Finance in Tokyo. That’s the sixth consecutive week of net bond purchases.
The nation’s current-account balance after seasonal adjustment swung to a 125.2 billion-yen deficit in September, a record-low in data stretching back to 1996. The shortfall underscores the drag on the economy from trade deficits exacerbated by swelling energy costs and the yen’s depreciation.
“External accounts have no question deteriorated,” Deutsche Bank’s Ruskin said. “You’ve been having a broader hollowing out of Japanese industry that relates to large foreign-direct investment outflows. You have what was previously the bulwark of yen strength, which is all of a sudden much less constructive.”