Japan's effort to prop up the yen through a joint currency intervention with the United States appears to have given investors a better entry point to expand carry trade positions rather than curbing the practice.
Japanese investors net bought more than 5 trillion yen of foreign equities and long-term bonds over the two weeks ended Aug. 15, compared with net selling of over 300 billion yen in the prior two weeks, according to Ministry of Finance data. Market watchers said the purchases suggest investors used the yen's sharp rally following last month's intervention to buy overseas assets at more favorable exchange rates.
"Intervention has 'turbo charged' the carry trade for fundamental & long term investors," said Jesper Koll, expert director at Monex Group. "As long as the cost of money in Japan is lower than the return overseas, carry trades will re-assert," he said.
The yen strengthened from around 164 per dollar before the intervention to roughly 155, but surrendered a large chunk of those gains and has since weakened back toward 159 against the dollar. The U.S.-Japan 10-year yield spread stood at roughly 1.8 percentage point as of Thursday.
Structural forces remain unchanged
- Francis Tan, Asia chief strategist at Indosuez Wealth Management, said "the intervention only addressed a 'symptom', but [is] not curing the 'disease,'" citing Japan's low borrowing costs and wide interest-rate differentials with other major economies.
- Masahiko Loo, fixed income strategist at State Street Investment Management, said long-term investors such as pension funds and asset managers continued selling yen.
- Koll said Japanese retail and institutional investors used the stronger yen to establish new positions in non-yen assets, particularly higher-yielding U.S. bills and bonds.
- Ashwin Binwani, founder of Alpha Binwani Capital, said institutional investors remained positioned in carry trades against a basket of G10 currencies, led by the Australian dollar.
Loo noted that long-term investors are continuing to sell low-yielding yen against higher-yielding G10 currencies, consistent with the currency being used to fund positions elsewhere. "The market is far less one-sided than before the intervention, but the incentives to fund in yen remain attractive while U.S.-Japan rate differentials stay wide," he said.
Some currency traders are also rebuilding bearish bets on the yen as the impact of the intervention fades. Binwani said he exited long dollar-yen positions after the U.S.-backed intervention before re-establishing them just above 157, expecting the yen to weaken further. "Upon news of the U.S. intervention, we took profit and once again re-established dollar yen long positions just slightly above 157," he said, adding that each intervention-driven rally could offer investors a better entry point to sell the currency.
Source: CNBC