These Investors Changed Course on the Yen During the Flash Move

(Bloomberg) -- The yen’s spectacular start to 2019 has been a case of too much, too soon for two influential investment firms that between them manage about $1 trillion in assets.

AllianceBernstein Ltd., which oversees about $550 billion, sold the currency as it surged 4 percent last week amid the dollar’s flash crash. Manulife Asset Management cut its holdings of the yen against the Australian dollar that day.

The Japanese currency was the only one among the Group-of-10 exchange rates to gain versus the dollar last year, and trade tensions as well as the risk of a global economic downturn had analysts calling for further strength. Still, the yen briefly blew through the median year-end forecast of a Bloomberg survey in the first few days of the year on conviction the Federal Reserve will stay on hold in 2019, causing investors to wonder how much more it could strengthen.

“The currency has rallied too far in a short space of time,” said John Taylor, a portfolio manager at AllianceBernstein, who switched positions from long yen to short during the recent rally. “The yen has been the most correlated currency with the Fed funds pricing, so as we expect the front end of the Treasuries market to move higher, the yen should weaken a little.”

The yen traded around 109 per dollar on Wednesday, having advanced almost 1 percent in the new year. It has strengthened more than 9 percent in the last three years even as the Bank of Japan’s stimulus meant the nation’s 10-year yield has stayed below zero for most of that period.

Manulife had a long position on the yen versus the Australian dollar as a risk-off position but cut its exposure during last week’s volatility. Last Thursday’s move felt “excessive,” according to David Rule, a portfolio manager at the firm that oversees almost $400 billion.

Market sentiment has now moved less in favor of the yen, Rule said. The currency’s recent surge came as stocks slid after data across the world’s biggest economies showed signs of weakness.

Still, not everyone agrees cutting exposure is the right strategy. For Van Luu, head of currency and fixed-income research at Russell Investments Ltd, last week’s moves showed the difficulty in predicting a risk-driven yen rally. He recommends investors hold onto their yen exposure to catch the next downturn in risk appetite.

“We’ve already had a big move, so it might consolidate for a little,” said Luu. Still, “I would continue to hold it because its very difficult to predict when exactly the move stronger comes.”

There is a good chance the yen will strengthen to 100 per dollar in coming months as global economic growth slows, a former senior Bank of Japan official said. That level would be tolerable, Kazuo Momma, a former executive director of the central bank, told Bloomberg.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

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