Hedge Funds Thought They Had the Yen Worked Out. They Were Wrong

  • Speculators lifted wagers on currency gains to 4-year high
  • Bank of Japan negative rate prompts biggest yen dive in a year

Hedge funds that thought a stronger yen was their ticket to big gains underestimated just how quickly the Bank of Japan would prove them wrong.

Speculators boosted wagers on yen strength to the highest since 2012 this week, just days before the central bank’s monetary policy decision sent the currency tumbling Friday by the most in a year. Japan’s currency slid against all of its 16 major peers, and erased this year’s gains versus the dollar.

Money managers sought to piggyback on a stream of cash flowing into haven currencies, including the yen, amid concern that a slowdown in China would damp global economic growth. The currency had rallied 1.2 percent this month before BOJ Governor Haruhiko Kuroda on Friday called time on that spurt, announcing a negative deposit rate that none of 42 economists surveyed by Bloomberg predicted.

“Kuroda’s a big fan of surprises, and here he is again,” said Sireen Harajli, a currency strategist at Mizuho Bank Ltd. in New York. “The market positioning was very long yen, and that definitely didn’t help the situation.”

The yen fell 2 percent this week to 121.14 per dollar in New York. The currency is down 0.8 percent from Dec. 31.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers and was little changed from a week earlier, added 1.6 percent in January. The euro has slipped 0.3 percent this year.

Pain Trade

Hedge funds and other large speculators lifted net bets on the yen to 50,026 contracts in the week ending Jan. 26, from 37,653 a week earlier. That’s the highest since February 2012, Commodity Futures Trading Commission data show. Investors had been betting against the yen until early January, when positioning switched from being net short to net long.

“It’s very unfortunate for investors,” said Adam Patti, the Rye, New York-based chief executive officer of IndexIQ, New York Life Insurance Co.’s exchange-traded-fund unit. “The yen has been rallying and people thought that it was about time we saw the yen gain some strength.” IndexIQ has just under $1.8 billion of assets in its funds, including in strategies that seek to hedge currency risk.

Policy divergence is back in the spotlight as a result, with speculation mounting that the BOJ’s measure will accelerate easing by other central banks that would benefit from a weaker currency, sparking another round of competitive devaluations. European Central Bank President Mario Draghi last week promised to “reconsider” monetary policy in March.

The Federal Reserve may feel the reverberations of BOJ action via a stronger dollar. U.S. policy makers kept their interest-rate target unchanged this week and said they will monitor the economy as they consider rate increases. U.S. reports on nonfarm payrolls, manufacturing and inflation are due next week.

Lowering rates “provides the BOJ with more bullets because now they can push against a strong yen by pushing negative deposit rates further,” Athanasios Vamvakidis, head of Group-of-10 currency strategy at Bank of America Merrill Lynch in London, said in an interview on Bloomberg Television. “We still like selling euro-yen because we believe that at the end of the day the ECB will do more than the BOJ, and there is a lot of catching up to do.”

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