Yen Bulls Betting on BOJ Bask in Stock Rout, Add to Wagers

(Bloomberg) -- Yen bulls who were betting the Bank of Japan will edge away from monetary stimulus are basking in this month’s global stock slump, which has propelled the currency to the strongest in 15 months.

AMP Capital Investors Ltd.’s Nader Naeimi this week added to his long yen positions, wagering the currency will strengthen against the dollar, pound and Philippine peso among others. Singapore-based Kit Trading Fund Ltd., a hedge fund, is betting the yen will appreciate against the U.S. and New Zealand dollars, while Vantage Point Asset Management Pte favors a long position in dollar-yen volatility.

“On Tuesday I reinstated the significant long yen positions against the Taiwan dollar, Singapore dollar, U.S. dollar, pound and Philippine peso,” said Naeimi, head of a dynamic investment fund at AMP Capital in Sydney, which oversees about $137 billion. “This is a trade with an excellent risk/reward on its own, as well as an valuable hedge against my exposure in cyclical equity sectors."

The yen has rallied against all its developed-market peers this month as the global stock rout that began in early February boosted haven assets. The currency is typically supported in times of market turmoil by the fact Japan runs a current-account surplus. The yen extended gains to 106.18 per dollar on Thursday, the strongest since November 2016, as Japan’s Finance Minister Taro Aso said the currency’s move wasn’t abrupt enough to require intervention.

Taking Pains

Many yen bulls initially entered the trade predicting the currency would benefit as the Bank of Japan moves toward removing its record stimulus. The currency jumped more than 1 percent on Jan. 10 after the central bank cut purchases of longer-maturity bonds the day before. It held those gains even after Governor Haruhiko Kuroda took pains to stress the BOJ is still committed to its easing policy.

Traders betting on the yen are still looking to see some gains from tweaks to BOJ policy, though uncertainty over the composition of the board is holding them back. While local media reported last week that Prime Minister Shinzo Abe is set to nominate Kuroda for another five-year term, the identities of his two deputies are still unknown.

“One risk event now is the new BOJ leadership,” said Keith Dack, a hedge-fund manager at Kit Trading Fund in Singapore. “I have been in and out of yen, but am currently short dollar-yen and New Zealand dollar-yen.”

Uncertainty surrounding the path of Federal Reserve tightening may also continue to roil financial markets and bolster Japan’s currency. New Chairman Jerome Powell oversees his first meeting of the Federal Open Market Committee on March 20-21.

‘Another Leg’

“There’s a risk that the recent volatility will continue as markets attempt to bully the Fed chairman around his first widely expected rate hike,” AMP Capital’s Naeimi said. “I’m expecting another leg down in markets in early March into the FOMC to set the stage for a durable market rebound into the second quarter.”

Another way funds are playing the yen is seeking to profit from its increasing volatility. One-month implied volatility for the dollar-yen currency pair, a measure of anticipated price swings based on options, jumped to 10.8 percent on Feb. 6, the highest since April.

“The yen and yen volatility tend to act as a safe haven when global cross-asset volatility increases,” said Nicholas Ferres, chief investment officer at Vantage Point in Singapore. “Yen volatility is also negatively correlated to global business sentiment.”

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