Yen Bulls Burned After BOJ's Surprise Spurs Biggest Rout in Year

BOJ's Surprise Decision: What Message Did It Send?
  • Bullish yen positions had reached most in almost four years
  • `The BOJ decision will have a lasting negative effect on yen'

Yen speculators got burned again by Bank of Japan Governor Haruhiko Kuroda.

QuickTake Negative Interest Rates

The currency held losses against most of its major peers and bond yields dropped to fresh records on Monday after Kuroda unexpectedly announced a negative interest-rate strategy on Friday, setting off the yen’s biggest drop against the dollar since October 2014. The move hammered hedge funds and other large speculators that had built up the most bullish yen position in almost four years as a rout in global stocks spurred demand for havens. Australia’s dollar weakened after China’s official purchasing managers index dropped to a three-year low.

“The BOJ decision will have a lasting negative impact on yen because speculative positioning was the wrong way and Kuroda’s battle to reach agreement on negative rates raises the risks of further action in months to come,” said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking Corp. “Negative rates in Japan are a bigger deal than any given month’s China PMIs.”

The yen slid 0.1 percent to 121.26 per dollar as of 6:47 a.m. in London after slumping as much as 2.3 percent on Friday to 121.69, its lowest since Dec. 18. The currency closed down 1.9 percent at 121.14 on Friday, its biggest daily decline since October 2014 when the BOJ surprised markets by expanding its stimulus. The yen fell 0.7 percent in January.

JGB Rally

Japanese 10-year notes extended their strongest rally in more than a decade, driving the yield down to a record 0.05 percent. The yield on two-year debt declined to an unprecedented minus 0.16 percent.

The BOJ said it will set negative interest rates to spur banks to lend in the face of a weakening economy, complementing its record asset-buying purchases. By a 5-4 vote, policy makers introduced a rate of minus 0.1 percent on certain excess holdings of cash.

Net long yen positions rose to 50,026 contracts in the week to Jan. 26, the highest since the week to Feb. 7, 2012, Commodity Futures Trading Commission data showed. Speculators added to bullish yen positions for five consecutive weeks.

With the BOJ adopting negative rates, “the yen will be saved from being singled out for buying when risk-off events take place,” said Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities Co. “This makes it difficult to build up yen-long positions and buy the yen on risk aversion. The BOJ’s move cut off correlations with oil prices and stocks.” Yamamoto revised his outlook for the dollar-yen this year to 117-130 from previous 116-127 previously.

China PMIs

Australia’s dollar declined 0.2 percent to 70.68 U.S. cents after slumping as much as 0.6 percent.

The Aussie trimmed losses after a second factory gauge report from Caixin Media and Markit Economics beat analysts’ forecasts and improved from December’s reading. China’s purchasing managers index for manufacturing released earlier signaled conditions deteriorated for a sixth month in January.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE