Yen Climbs a Third Day on Bond Yield Concern; Rand Drops

The yen strengthened for a third day against the dollar amid concern the Bank of Japan is struggling to control a jump in government bond yields.

The yen gained versus most of its 16 major peers after BOJ Governor Haruhiko Kuroda said yesterday Japan could cope with rising interest rates. Yields on JGBs rose to the highest in more than a year on May 23, damping the appeal of selling the yen in search of higher yields elsewhere. Futures traders increased bets to the most since July 2007 that the yen will fall against the dollar. South Africa’s rand slid before a report tomorrow that is expected to show growth slowed.

“The short-yen trade has been driven mainly by speculative money on the expectation that ultimately Japanese investors would also join the trade,” said Beat Siegenthaler, a currency strategist at UBS AG in Zurich. A short position is a bet that an asset’s value will fall. “If higher JGB yields mean this is not going to happen, or to a lesser extent, then this will be a problem for short-yen positions.”

The yen rose 0.2 percent to 101.09 per dollar at 1:57 p.m. New York time after jumping 1.9 percent last week, the steepest climb since the five days ended June 1. It gained 0.2 percent to 130.69 per euro after a 1.2 percent advance in the five days ended May 24. Europe’s common currency was little changed versus the dollar at $1.2928.

Markets in the U.S. and U.K. are closed for public holidays.

Net Shorts

Data from the Washington-based Commodity Futures Trading Commission showed the difference in the number of wagers by hedge funds and other big speculators on a decline in the yen versus those on a gain, known as net shorts, was 95,186 on May 21, compared with 88,407 a week earlier.

“Given the amount of leverage that there is in short-yen positions, if you start to see any kind of slight unwind, stop losses just snowball,” said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and interest-rate risk-management company. A stop-loss order is an automatic instruction to buy or sell a currency at a certain level to limit losses.

The yen has weakened 17 percent in the past six months, the worst performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes as Prime Minister Shinzo Abe pledged to end 15 years of deflation and the BOJ doubled monthly bond purchases to stimulate the economy.

Yields on Japan’s 10-year government bonds were at 0.82 percent today after reaching 1 percent on May 23, the highest since April last year. The rate completed a three-week gain of 28 1/2 basis points on May 24, the most since April 2008.

Bond Volatility

Some BOJ board members attributed increasing bond volatility to central bank debt purchases that aim to meet a 2 percent inflation target, according to minutes of policy makers’ April 26 meeting released today.

A few noted that expectations for downward pressure on yields from large-scale JGB purchases along with a pledge to achieve the BOJ’s price target “might initially have been perceived by market participants as contradictory,” the minutes said. “This perception had led to fluctuations in financial markets.”

Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., said investors should watch for a selloff in Japan’s currency and bonds.

Gross, who runs Pimco’s $293 billion Total Return Fund in Newport Beach, California, said the BOJ “dominates asset markets for better or worse.”

“Watch JGBs, the yen and the exodus from each,” he wrote in a Twitter post.

Rand Weakens

South Africa’s rand declined for a second day before a report tomorrow that economists said will show growth in Africa’s biggest economy slowed in the first quarter.

Gross domestic product expanded at an annualized 1.6 percent in the three months through March from 2.1 percent the previous quarter, according to the median estimate of 15 economists in a Bloomberg survey. Growth is stalling as labor disruptions curb mining output amid slowing global demand for the nation’s exports.

The rand fell 0.3 percent to 9.6012 per dollar after touching 9.6948 on May 23, the weakest since March 2009. The South African Reserve Bank is concerned by volatility in the currency, not the level, Deputy Governor Lesetja Kganyago told reporters today in Johannesburg.

The Australian dollar fell amid concern that a deceleration in China’s economy will reduce demand for commodity exports.

China won’t sacrifice the environment to ensure short-term growth, President Xi Jinping said during a study session of the Communist Party’s top leadership on May 24.

“The slowdown in Chinese demand may persist going forward and continue to weigh on the Australian dollar,” Citigroup Inc. analysts, including Amanda Chow in New York, wrote in a research note today.

The so-called Aussie weakened 0.2 percent to 96.344 U.S. cents after falling to 96.15 cents.

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