Stars Are Aligned for Cheap Hedging Costs to Drive Yen Gains
- Overseas investment in Japanese stocks has rebounded recently
- RBC sees yen appreciating 7% against dollar within next year
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It’s been getting cheaper for Japanese investors to hedge their foreign-exchange risk and that has the potential to push the yen higher in the coming quarters.
Bond yields around the world have slumped toward, or in some cases fallen below zero, and that has had the effect of reducing global hedging costs for investors. For Japanese institutions -- which hold a lot of foreign assets -- that may act as an encouragement to increase the amount of yen they buy on a forward basis to mitigate against exchange-rate fluctuation. With implied dollar-yen volatility still above realized volatility levels, that’s certainly a risk, which will be on many an investor’s radar.