Yen Traders Paralyzed as Central Banks Become Guessing Gameby
Some investors are closing out their dollar-yen positions
Slim majority of economists see more easing by BOJ next week
Just when the world is most craving clarity on the future of Japan’s monetary policy, currency markets show it has become particularly hard to predict.
With so little consensus on what Bank of Japan Governor Haruhiko Kuroda will come up with for the Sept. 21 policy decision, Eaton Vance Corp. and a unit of Bank of New York Mellon Corp. are abstaining from any positions in the yen, while JPMorgan Chase & Co. says some investors have closed out bets on declines in the dollar versus the Asian currency. Such is the consternation that the options premium on contracts to buy the yen in a month’s time disappeared for the first time since November, before reversing course this week.
Japan became the epicenter of a global bond selloff this month, amid speculation the central bank will pull back from buying long-term bonds after Kuroda ordered a comprehensive review of its easing program. The governor acknowledged last week that low long-term yields hurt returns on pension and insurance investments, even as he signaled there would be no reduction in easing. The Federal Reserve will decide on interest rates just hours after the BOJ’s meeting, adding to the quandary about the yen’s direction.
“There is a chance that the yen weakens from these levels if the BOJ is more aggressive in new monetary easing than people expect, but getting the timing of that right is difficult,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance, which oversees about $330 billion. “Given the current risk-reward and all other variables in the world such as the trend in the dollar and U.S. rates, we don’t currently have a position in the yen.”
The currency, as well as the central bank, has the potential to surprise. Kuroda’s shock announcement of a negative deposit rate on Jan. 29 weakened the yen only briefly, to the low for the year of 121.69 per dollar. After that it strengthened -- reaching as high as 99.02 in June for the first time since 2013 after Britain voted to leave the European Union. The exchange rate was at 101.86 as of 6:55 a.m. in New York.
Just over half of economists surveyed by Bloomberg anticipate expanded easing next week, with a rate cut seen as the most likely option.
“There is an expectation that the BOJ might do something, but the problem is the market is mixed on what that might be or whether it’s something new that we haven’t even seen yet,” said Laura Fitzsimmons, Sydney-based vice president for rates and foreign-exchange sales at JPMorgan, the world’s second-largest currency trader. “Dollar-yen, if anything, probably has a slight bias higher still from these levels.”
Options traders are also sending mixed messages. The premium for contracts to buy the yen versus the dollar in one month, over the cost of those to sell, was at 0.5 percentage point Thursday, after largely disappearing from end-August through last week.
Shorter term they have turned more bearish, paying a premium of 0.8 percentage point for one-week contracts to buy the dollar against the yen over those allowing for sales. On June 22, the right to purchase the Japanese currency cost 4.5 percentage points, the most in more than seven years.
The Japanese currency has traded within a six-yen range versus the dollar since the last BOJ gathering on July 29, when the central bank underwhelmed markets with a stimulus boost that fell short of analyst expectations. Its announcement of a comprehensive review of its policy framework then intensified concern that Kuroda had few tools left to revive the economy as his goal of raising inflation to 2 percent proved to be elusive.
Fluctuations in the debt market have been more volatile than the yen before next week’s meeting. Yields on Japan’s long-term government bonds climbed Wednesday to a six-month high on speculation policy makers would seek a steepening in the curve that plots yields of different maturities to mitigate the pain on banks and savers from negative interest rates.
While it’s unclear what a steeper yield curve that might be sought by the BOJ would mean for the yen, the threat of a pullback in higher-yielding assets could fuel demand for the Japanese currency as a haven, said Paul Lambert, the London-based head of currencies at Insight Investment Management Ltd., a unit of Bank of New York Mellon, which manages about $580 billion.
Bullish bets on the currency remained close to the record high reached in April as hedge funds and other large speculators added to wagers that sought to profit from its strength since the start of the year, data from the Commodity Futures Trading Commission showed.
“The market’s already very long the yen so that would make you cautious to buy,” Lambert said. “Our conclusion is the best place to be in the short term is on the sidelines and let these things play out.”