(Bloomberg) — Every intervention to prop up the yen is also creating a fresh opportunity to sell it.
The historic joint US-Japan action last month has done little to shift the forces weighing on the currency, with the yen sliding back toward 160 per dollar less than two weeks later. The key is the wide gap between interest rates in Japan and elsewhere. Investors can borrow the low-yielding yen and use the money to buy higher-yielding assets — a strategy known as the carry trade.
That means when intervention pushes the yen higher, investors can get a better price to sell it. Hedge funds have halved their bearish yen bets through Aug. 4, but some investors are starting to return to carry trades funded by the currency, according to market watchers including JPMorgan Private Bank and State Street Bank & Trust.
Among them is Ashwin Binwani, founder of private investment firm Alpha Binwani Capital, who bought the dollar against the yen at around 157, a position that gains as the Japanese currency weakens. The pair is currently at 159.46.
“Intervention is a great opportunity to sell the yen at higher levels,” Binwani said. “We are not daunted by their actions. The carry trade is too good to miss.”
It’s an opportunity that comes with considerable risk. As investors rebuild short positions, they also raise the chances that authorities step in again.
Yet the forces weighing on the yen remain. Japan’s 1% policy rate is lower than in most developed economies, while fiscal concerns add to the pressure. The yen has erased half its intervention-driven gains and weakened against almost every peer over the past week.
Shorting the yen against the higher-yielding Colombian peso, Turkish lira and Norwegian krone would have each returned more than 10% this year.
Bart Wakabayashi, Tokyo branch manager at State Street Bank & Trust, said the firm’s proprietary data show real-money accounts remain positioned for the carry trade, with the yen being sold against a range of Group-of-10 currencies.
The biggest interest is against the Australian dollar, followed by the euro, US dollar, Canadian dollar and pound, he said.
“Unless we see a meaningful turn lower in the dollar and US yields, carry traders may push the pair to retest 162,” said Yuxuan Tang, Asia head of rates and foreign-exchange strategy at JPMorgan Private Bank. Markets also recognize that repeated intervention is increasingly costly for Japan, she added.
Tokyo likely spent around $34 billion intervening in the currency market to support the yen on July 31, according to a Bloomberg analysis of central bank accounts. That followed an estimated $53 billion intervention the previous day, which would be the largest single-day operation on record if confirmed.
Treasury Secretary Scott Bessent has reiterated US support for stabilizing the yen, saying its weakness risks broader depreciation across Asia, and that Washington will do “whatever it takes” to support Japan.
What Bloomberg Strategists Say…
The rise in one-year yen forwards should be setting off alarm bells in Tokyo. That move is typically associated with outright dollar buying, suggesting currency traders are using the yen’s post-intervention bounce to reload carry trades and position for another extended spell of weakness.
— Mark Cranfield, Markets Live strategist. Read more here.
The yen may become less attractive as a funding currency if traders expect further intervention or follow-up action from the BOJ. Either could trigger bouts of volatility, forcing investors to unwind positions rapidly and amplifying moves across markets.
In a sign of growing concern over yen weakness, Prime Minister Sanae Takaichi’s government is supportive of a near-term rate hike by the Bank of Japan, with the next move likely either in September or October, people familiar with the matter have told Bloomberg.
“If intervention is successful in terms of preventing further depreciation, yen should not exceed 162 levels,” said Carol Lye, portfolio manager and senior research analyst at Brandywine Global Investment Management in Singapore. She added that carry trades can instead be funded in other relatively low-yielding currencies such as the euro or Swiss franc.
Investors such as Damien Loh, chief investment officer of Ericsenz Capital in Singapore, aren’t dissuaded. He started buying dollar-yen again at around 157 after the last round of intervention. Beyond earning positive carry, the trade can also provide a hedge for other short greenback positions elsewhere in a portfolio, he said.
“I like long gold or long Aussie because the dollar debasement narrative is coming back all over again,” Loh said. “If I didn’t want to have so much dollar beta, I could just buy dollar-yen. So you have a hedge and it carries positively for you — happy days.”
Overnight index swaps imply traders are pricing in one quarter-point BOJ rate hike by October, though that would do little to narrow the gap with the US. While subdued US inflation data have reduced expectations for an imminent Fed hike, the central bank is still likely to tighten this year.
George Efstathopoulos, a portfolio manager at Fidelity International, sees ongoing demand for carry bets, but with more volatility given the US backing.
“For as long as the Bank of Japan is behind the curve, then yen-funded carry trades can continue to flourish,” he said.
–With assistance from Masaki Kondo.
More stories like this are available on bloomberg.com
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