Hedge Funds Wary of Shorting Euro, Yen as Currencies Defy QE

  • Traders have been reducing bets the euro and yen will weaken
  • Euro and yen were best performers versus dollar last quarter

Even before Friday’s payrolls data, hedge funds had been reducing speculation on a weaker yen and euro.

Bets that the euro will fall against the dollar are less than half they were before the European Central Bank announced a bond-purchase program in January, while those that against the yen slid to a fifth of the level in June, according to the latest data from the Commodity Futures Trading Commission. The reduction in such positions have come even though their central banks are running bond-purchase programs that typically weaken currencies.  

A gauge of the greenback fell to a two-week low on Friday after U.S. wages stagnated and the hiring figures disappointed economists. The yen and euro strengthened the most of 16 major currencies against the dollar in the third quarter as China’s devaluation of the yuan triggered a rout in emerging markets and fueled demand for haven assets. A rally in the dollar that started in the middle of 2014 has paused as traders reduce bets the Federal Reserve will raise interest rates this year.

“The fact that other forces have prevented the euro and yen from depreciating in a substantial and sustained way have proven to be a source of frustration for speculative investors and pressured them to trim their positions,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “The delay in the start of the Fed tightening has also certainly taken a bit of wind out of the sails of the dollar bulls.”

The euro and yen will weaken as the Fed is poised to increase rates in December and slower global growth increases the chances of additional stimulus by the ECB and BOJ, Goldman Sachs Group Inc. analysts, including Robin Brooks, chief currency strategist in New York, wrote in a report dated Oct. 4.

Goldman’s View

While Goldman Sachs’s economics team predicts Japan’s central bank will expand stimulus at its Oct. 30 meeting, it doesn’t rule out the possibility of a surprise easing at this week’s policy meeting, the analysts wrote in a separate report dated Oct. 2. They said last month the euro may drop by as much as 10 U.S. cents and the yen will weaken to 130 per dollar next year.

Analysts have raised their year-end forecast of the euro by 4 U.S. cents to $1.08 since May, and boosted their prediction for the yen to 123 per dollar from 126 in July, according to median estimates in Bloomberg surveys.

The euro was at $1.1235 as of 7:50 a.m. in London, up from a 12-year low of $1.0458 reached on March 16. Japan’s currency has strengthened to 120.03 per dollar since depreciating to 125.86 in June, the weakest since 2002.

‘More Difficult’

Bets the euro will decline against the dollar fell to 87,660 last week, from 180,730 in January and as much as 226,560 at the end of March, according to the CFTC in Washington. ECB President Mario Draghi increased quantitative easing by announcing a $1.3 trillion asset-purchase program on Jan. 22. Investors have cut net-short positions in the yen to 22,052 last week, from 116,286 in the period ended June 9, the data show.

Japan’s currency will probably slide past 125 per dollar as the central bank is set to add to stimulus in one of its two policy meetings this month, said Homin Lee, regional economist for Asia at Lombard Odier in Hong Kong.

“It is becoming more difficult for the currency to weaken massively against other currencies in the medium-term due to new policy developments in the U.S. and China,” Lee said. “But without another monetary easing episode that brings Japan closer to the BOJ’s inflation target, we will not describe the currency as near the bottom.”

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