Japan's Margin Traders Keep Faith With Fed in Record Yen Shorts

  • Retail investors increased positions as yen rallied in August
  • Rates futures in U.S. indicate no Fed liftoff until March 2016

Whether or not the Federal Reserve raises interest rates this month, or even this year, Japan’s leveraged foreign-exchange investors are putting more money on the line than ever on expectations the yen will slide against the dollar.

Wagers from individuals for the Japanese currency to decline outnumbered bets it would gain by 614,623 contracts as of Oct. 13, the biggest net shorts since Tokyo Financial Exchange Inc.’s Click 365 began collecting the data in 2006. Those decisions may already be paying off with the yen weakening for six straight days to Thursday -- the longest run since a seven-day retreat to June 1 -- before the Federal Open Market Committee and Bank of Japan each decide policy next week.

“At the root of it, the view among individual investors has never changed that the Fed will be raising rates while the Bank of Japan conducts monetary easing,” said Junichi Ishikawa, an analyst at IG Markets in Tokyo. “These investors tend to buy and hold positions, and they’re adding to strong dollar bets now.”

Contrarian Stance

Known for often taking a contrarian stance, Japan’s individual investors added to bearish yen positions after the currency surged from around 125 per dollar to a seven-month high of 116.18 in a two-week span in August as global stocks tumbled, according to Ishikawa. In September, as the currency ranged around 120 per dollar, individual investors used any rallies in the yen to increase their shorts, he said.

The Japanese currency slid 1.3 percent this week to 120.94 per dollar as of 9:10 a.m. in Tokyo on Friday, set for its steepest decline in more than a month.

Futures traders don’t expect the Fed to raise rates until March, when the odds are 56 percent, according to data compiled by Bloomberg. The U.S. central bank has kept its benchmark near zero since the end of 2008 and last carried out an increase in 2006. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

The probability of liftoff this year has fallen to 30 percent, from 73 percent before China unexpectedly devalued the yuan in August, sparking turmoil across markets. The FOMC next sets policy on Oct. 28.

Fifteen of 36 economists surveyed by Bloomberg between Sept. 29 - Oct. 2 predicted the BOJ will expand stimulus at its Oct. 30 meeting. Governor Haruhiko Kuroda said this month that Japan’s inflation trend is improving, even as he reiterated that the central bank would make adjustments to policy if necessary.

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