State Street Cuts Bullish Yen Bets as 2017’s Top Performer Fades

(Bloomberg) -- State Street Global Advisors Inc. has unwound bets on the yen strengthening against the greenback as the best-performing developed-market currency this year starts to fade and the money manager awaits clarity on Bank of Japan’s new yield-control framework.

The fund manager, which oversees $2.3 trillion in assets, has cut long positions it held “because of a valuation view” on Japan’s currency for 18 months as the economic data from the Asian nation softened, Collin Crownover, the money manager’s Boston-based head of currency management, said in an interview in Sydney on Thursday.

The BOJ announced Sept. 21 it would move away from a rigid target for expanding money supply, while seeking to control bond yields across different maturities. The central bank said its target for expanding the monetary base through asset purchases, previously set at 80 trillion yen ($761 billion) annually, may fluctuate in the short term to enable policy makers to control bond yields.

“Now we have this new yield-targeting regime, which on the surface is quite straightforward, but what it means in practice is a little bit unclear,” Crownover said. “What I don’t know yet is, if this is actually the tapering of quantitative easing or it an expansion? Until I get a handle on that, we are disinclined to take much risk in the yen and we’ve been basically neutral.”

State Street’s earlier bullish bet on the yen was placed when its models showed the currency was undervalued by as much as 35 percent and Japanese economic data was outperforming some developed-market peers, Crownover said. Those factors have reversed course, he said. The yen is set for its biggest monthly loss since May amid bets the Federal Reserve will raise interest rates this year while the BOJ will maintain monetary stimulus.

The currency has lost 3.6 percent against the dollar this month, paring gains for the year to 14 percent. It was at 105.17 as of 12:45 p.m. Friday in Tokyo.

Markets are still puzzling over the implications of the BOJ’s changes, with Japan’s benchmark 10-year sovereign yields initially rising above zero for the first time since March before sliding to a one-month low. Sumitomo Mitsui Banking Corp. and JPMorgan Asset Management say the central bank’s new framework is effectively a tapering of stimulus. Governor Haruhiko Kuroda and the his board meet Oct. 31-Nov. 1 to assess the progress of yield targeting move and decide policy.

Maybe when more data on the BOJ’s asset purchases come out, “we’ll have a little bit more confidence about what that means,” Crownover said.

To contact the reporter on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Jonathan Annells, Tomoko Yamazaki