Yen Gains on China's Surprise Yuan Fixing, Kuroda's Policy Views

  • Yuan fix was lower than models anticipated, RBC's Trinh says
  • BOJ governor acknowledged stimulus limits in parliament

The yen gained after China cut its daily yuan fixing by the most in six weeks, surprising investors who’d anticipated little movement before the Group-of-20 meeting this week and fueling demand for haven assets.

Japan’s currency rose to its strongest level since October 2014 versus the dollar. The People’s Bank of China reduced the reference rate for the yuan below what most models expected, according to Sue Trinh, head of Asian foreign-exchange strategy at Royal Bank of Canada in Hong Kong.

Options traders are the most bullish in 5 1/2 years on Japan’s currency as jitters about China’s exchange-rate management coincide with Japan weighing the limits of its own monetary policy. Bank of Japan Governor Haruhiko Kuroda’s told parliament that expanding the monetary base won’t on its own resolve the issue of slow inflation, hinting that his view on the power of stimulus has shifted.

“If China were to devalue, all of emerging Asia devalues, and then it’s an open question as to whether Japan can or would devalue, so I guess it’s a little bit of a regional safe haven,” said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. Kuroda’s comments may suggest “there’s less probability that the BOJ increases QE in March. That’s probably a better explanation of why yen is up.”

The yen advanced 0.7 percent to 112.10 per dollar as of 5 p.m. in New York, following a 0.3 percent decline Monday. The Swiss franc, another haven, also rallied, adding 0.9 percent to 1.0924 per euro, touching the strongest level in a month.

Highest Premium

Japan’s currency has been the chief beneficiary of a wave of risk aversion that’s swept through markets this year amid concern that a slowdown in China will damp growth around the world.

China’s currency move was particularly surprising coming before the G-20 meeting of central bankers and finance ministers in Shanghai later this week, according to Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd. The central bank cut the reference rate to 6.5237 per dollar from 6.5165.

Traders paid 2.62 percentage points more for options to buy the yen in six months’ time than for contracts to sell, touching the biggest premium since July 2010 based on closing prices, data compiled by Bloomberg show.

“The BOJ is not happy to see the yen strengthen this way, but Japan’s problems go much deeper than the exchange rate,” David Kelly, chief global strategist of JPMorgan Funds in New York said on Bloomberg Television. “They spend too much time trying to manipulate this exchange rate. They introduced negative interest rates to try to keep the exchange rate weak and it had exactly the opposite effect.”

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