Yen Bulls Vulnerable to Kuroda Shock Amid Record Hedge Fund Bets

  • Beware `shock and awe' from BOJ, RBS's Mohi-uddin warns
  • Central bank said to be looking at negative rate on loans

Yen bulls are at risk from Haruhiko Kuroda’s favorite tactic: surprise.

By pushing bets on a stronger currency to the most on record, speculators have left themselves vulnerable should the Bank of Japan governor blindside them with additional stimulus at the April 27-28 policy meeting. And a warning light is blinking in the options market, where the premium on contracts to buy the yen in a week’s time disappeared for the first time since January.

Japan’s policy chief already has a track record of shocking markets -- his introduction of negative interest rates in January briefly sent the yen tumbling. The decline rapidly unraveled, leaving the currency with a 9 percent gain this year that’s endangering Kuroda’s efforts to stave off deflation. But the yen dropped again on Friday amid reports the BOJ may consider helping banks lend by offering a negative rate on some loans.

“Short dollar-yen is now a consensus trade,” said James Purcell, cross-asset strategist at UBS Group AG’s wealth-management business in Hong Kong. “The market was caught on the wrong side when the cross fell in the first quarter. There is a danger people will get wrong-sided again.”

Greater Stimulus

Additional fiscal and monetary stimulus will probably weaken the yen toward 120 per dollar in the next six months, Purcell said, from 110.46 as of 9:30 a.m in London on Friday and compared with an 18-month high of 107.63 reached on April 11.

Bullish bets on the yen by hedge funds and other large speculators exceeded those benefiting from losses by 66,190 contracts in the week ended April 12, the most in data going back to 1992, according to the Commodity Futures Trading Commission in Washington. Strategists have responded by raising the median mid-year yen forecast in a Bloomberg survey to 113 per dollar, from 124 on Dec. 31.

Senior BOJ officials are said to be increasingly concerned that the stronger currency will hamper their efforts to spur growth and inflation.

Twenty-three of 41 analysts surveyed by Bloomberg expect the central bank to expand stimulus next week, with eight projecting a cut to its negative rate. Any decision to offer negative-rate loans could utilize the BOJ’s Stimulating Bank Lending Facility, according to people familiar with the matter.

‘Shock and Awe’

“The BOJ will aim to shock and awe the markets in order to push the yen weaker again,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc.

The central bank will boost its annual stimulus program to 100 trillion yen ($905 billion) from 80 trillion yen, increase purchases of exchange-traded funds and cut the deposit rate from minus 0.1 percent to drag debt yields lower, Mohi-uddin said. That, he predicted, should send the yen sliding toward 115 per dollar by the end of June.

With speculation building that officials will act, options traders are now paying a premium of 1.4 percentage points for one-week contracts to buy the dollar against the yen over those allowing for sales, data compiled by Bloomberg show. On Feb. 9, the right to purchase the Japanese currency cost 2.8 points extra, the most in almost six years.

Go Short

Commonwealth Bank of Australia is advising clients to bet on short-term yen weakness, even as it sticks with a longer-term forecast for the currency to appreciate versus the dollar.

Amundi SA, Europe’s biggest publicly-traded money manager, predicts the yen still be around 110 per dollar in six months. Further easing will only weaken the Japanese currency if it’s accompanied by renewed expectations of a rate increase by the Federal Reserve, said James Kwok, head of currency management at the investor in London.

“We have tactically taken profit on our long-yen position but still believe that having a long-yen position in the portfolio has a good risk-reward and diversification benefit,” he said.

Credit Suisse Group AG’s asset-management business has been selling the yen since it crossed the 110-per-dollar level for the first time since October 2014 earlier this month, said Robert Parker, senior adviser for investment strategy in London. He predicts it will weaken to 115 within three months, citing a U.S. rate increase in the third quarter that would make dollar assets relatively more attractive than yen securities.

“It’s very clear that the strong yen is causing damage to the Japanese economy,” Parker said in Singapore on Thursday. “The Bank of Japan wants to try and engineer a move down in the yen. I think they’ll succeed.”

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