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Forex

Hedge funds play a weak Japanese yen

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By Nell Mackenzie

LONDON (Reuters) – Pressure on Japan to prop up a weak yen may have ebbed, but currency weakness remains a headache for Tokyo.

The yen is down 9.4% against the dollar so far this year, and looks set for a fourth year of declines. That’s created a two-speed economy, with exports and tourism benefiting from a more competitive exchange rate while households and small businesses are squeezed by rising import prices.

Four investment managers shared four ideas on how to trade yen weakness. Their views do not represent recommendations or trading positions, which they cannot reveal for regulatory reasons.

1/ FLORIN COURT CAPITAL

* Diversified systematic asset manager

* Size: $2 billion assets under management (AUM)

* Founded in 2016

* Key trade: Short-Asia currencies ex-Japan

Florin Court CIO Doug Greenig says that instead of playing a weak yen, investors should put on bets against Asia’s emerging market currencies.

“Investors can consider shorting other Asian currencies like the Korean Won or the Thai Baht, where real interest rates are also relatively low versus some other EM currencies,” Court said. “And you don’t directly face the risk of BOJ intervention.”

The Bank of Japan (BOJ) was believed to have intervened twice, on April 29 and May 1, to stabilise a yen that had slumped to 34-year lows around 160 per dollar. It is now around 155.6.

The yen has weakened sharply for clear reasons: real interest rates are much higher outside of Japan.

U.S. rates have been kept high by loose fiscal policy and a robust economy. By contrast, Japan does not have a free hand in raising policy rates, Greenig said.

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Japan’s huge public debt pile is 263% of GDP, but the Bank of Japan holds almost half of that, so the situation might be more nuanced than it looks, he said.

2/ AQR CAPITAL MANAGEMENT

* Systematic asset manager

* Size: $108 billion

* Founded in 1998

* Long Japanese stocks

Jonathan Fader, managing director in the Macro Strategies Group at AQR Capital Management, says BOJ intervention complicates matters for yen bears but the key driver of yen weakness remains – accommodative Japanese monetary policy while rates elsewhere are at multi-year highs.

He favours Japanese stocks that benefit from currency weakness.

Fader noted that the tight relationship between the yen and Japanese shares broke down as Tokyo stepped up verbal intervention. But stock tailwinds remained, such as governance improvements and banks benefiting from an end to negative rates.

The BOJ in March delivered its first rate hike in 17 years.

“Should yen volatility calm down, Japanese shares could well resume their outperformance,” said Fader.

Japan’s blue-chip is off record highs hit earlier this year, but is still up some 16% year-to-date.

3/ MOUNT LUCAS MANAGEMENT

* Macroeconomic hedge fund

* Size: $1.5 billion

* Founded in 1986

* Dollar/yen forwards

For David Aspell, partner at Mount Lucas, a large U.S/Japan rate gap means investors will continue to use the yen as a funding currency for carry trades.

One way to play yen weakness is through currency forwards, contracts that allow investors to hedge FX risk, he said.

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Buying a dollar/yen one-year forward contract which trades at a discount to current levels means the currency pair would need to weaken over a year to loose money, said Aspell. Investors would gain if there is no change or dollar/yen strengthens.

“Intervention has the best chance of working medium term when it is a genuine surprise and when it is helped along by the fundamentals,” Aspell said.

4/ PINEBRIDGE INVESTMENTS

* Global asset manager

* Size: $168.2 billion

* Independent since 2010

* Buy high quality, investment grade portions in short duration, refinanced U.S. 2024 CLOs

The BOJ has also abandoned yield curve control where it capped long-term interest rates around zero, but said it would keep broadly buying government bonds as before and ramp up purchases if yields rise rapidly.

Since this policy’s 2016 start, Japanese investors sought higher returning investments elsewhere. The plus 5% yields on investment grade tranches (portions) of U.S. collateralized loan obligations (CLOs) drew many.

“Right now as investors in CLOs, they are our competition because they have such a strong demand for U.S. fixed income assets,” Laila Kollmorgen, a PineBridge managing director, adding that what Japanese investors do will determine how Pinebridge invests later in the year.

Now that JGB yields have hit decade highs, this might tempt Japanese investors to bring funds back home.

“We must remain nimble,” Kollmorgen says.

While the typical CLO deal length is eight years, she’d opt for newly reset CLOs in 2024. On these, the deal time has been restarted. She’ll look for an extended three-year reinvestment period, refinanced debt and lender protection against the bonds being paid back in full during the first year.

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Forex

Dollar slips off highs ahead of PCE data, euro sees some support

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Investing.com – The U.S. dollar edged lower Monday, consolidating after climbing to a near eight-week high last week, while the euro rose despite weak German business sentiment.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 105.235, after touching a high of 105.91 last week.

Dollar looks to PCE data for guidance

The U.S. currency received a boost last week after the release of stronger-than-expected readings, with the resilient U.S. economy potentially creating more room for the Federal Reserve to keep interest rates elevated.

Traders have banked some of those gains at the start of the new week, as the focus turns towards the release of price index data. 

Fed officials have called for more data showing a slowing of inflation before agreeing to cut interest rates, and this Friday’s reading of the Fed’s preferred inflation gauge is likely to factor into the outlook for interest rates.

Economists expect annual growth in the index to slow to 2.6% in May. A soft reading is likely to bolster bets on a rate cut as early as September, which futures currently price as a 65% prospect, according to the CME FedWatch tool.

Euro rebounds despite dip in Ifo reading

rose 0.2% to 1.0718, rebounding after recent losses despite German business morale unexpectedly falling in June.

The Ifo institute said its declined to 88.6 in June from 89.3 in May, compared with expectations of a reading of 89.7.

“The German economy is having difficulty overcoming stagnation,” said Ifo president Clemens Fuest.

The single currency has dropped over 1% this month after the right-wing performed well in the European Parliament elections earlier in June, resulting in French President Emmanuel Macron calling a snap election.

rose 0.1% to 1.2659, with sterling stabilizing after falling close to a five-week low in the wake of the Bank of England’s latest .

The BoE kept rates on hold, but some policy makers said the decision not to cut was “finely balanced”, raising expectations that policymakers will agree to a cut when they next meet at the start of August.

“Markets remain undecided on an August move (14bp priced in) and in our view, are also still too conservative on the total easing this year with 47bp versus our call for 75bp,” analysts at ING said, in a note.

“Our dovish BoE view means a bearish call on the pound this summer. We could also see some negative spillover on GBP from the UK election (4 July), where a Labour landslide win is largely expected – but perhaps a good result from the populist hard-Brexiteer Reform UK party may create some market jitters.”

Yen falls, drawing intervention talk  

In Asia, traded 0.1% lower to 159.68, retreating after the pair rose as high as 159.94 in early trade Monday, its highest since April 29, when it reached a 34-year high of 160.245 leading to Japanese authorities spending roughly 9.8 trillion yen to support the currency.

The yen’s recent weakness drew warnings from several major Japanese officials over more intervention, with the country’s main currency diplomat Masato Kanda saying the government would “intervene 24 hours a day if necessary.” 

edged higher at 7.2618, trading within a very narrow range with the yuan close to its lowest in seven months, hurt by worries about weakness in the world’s second-largest economy.

 

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Forex

Asia FX weak amid dollar strength; yen on intervention watch

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Investing.com– Most Asian currencies were fragile on Monday as the dollar steadied near two-month highs, while weakness in the Japanese yen sparked caution over potential intervention measures by Tokyo. 

Sentiment towards regional markets was also dampened by fears of a trade war between China and the European Union, after Chinese officials warned of retaliatory measures against European tariffs on Chinese electric vehicles. 

Markets were also reeling from stronger-than-expected U.S. purchasing managers index readings, which sparked heavy flows into the dollar and out of risk-driven assets. 

Japanese yen weak, on intervention watch as USDJPY nears 160

The yen was the biggest point of focus among Asian currencies on Monday, as its pair, which gauges the amount of yen needed to buy one dollar, came within spitting distance of 160 yen.

The level was the pair’s highest since 1986, and had attracted heavy amounts of government intervention in currency markets in May, which saw the USDJPY pair fall as low as 151.

The yen’s recent weakness drew warnings from several major Japanese officials over more intervention. Top currency diplomat Masato Kanda said the government would “intervene 24 hours a day if necessary.” 

His comments spurred some strength in the yen, with the USDJPY pair falling to 159.7 yen.

Chinese yuan, Asia FX under pressure from EU tensions 

The Chinese yuan’s pair steadied at a seven-month high on Monday, as the yuan was battered in recent weeks by souring relations between China and the EU.

Chinese officials said over the weekend that a trade war with the EU was possible in the face of import tariffs on Chinese EVs. German and Chinese ministers were also set to meet this week.

Concerns over a trade war kept traders averse to risk-heavy currencies, which sparked weakness in most Asian units. The Australian dollar’s pair fell 0.1%, while the South Korean won’s pair rose 0.1%. 

The Singapore dollar’s pair rose slightly, while the Indian rupee’s pair fell 0.1% but remained in sight of recent record highs.

Dollar strong, PCE inflation awaited

The and both rose slightly in Asian trade and were at their highest levels since early-May. 

The greenback was boosted by stronger-than-expected PMI readings, which sparked concerns that a resilient U.S. economy would give the Federal Reserve more headroom to keep rates high.

Focus was now on key data, due this Friday. The reading is the Fed’s preferred inflation gauge and is likely to factor into the outlook for interest rates.

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Forex

Dollar weakens after yen steadies amid intervention jitters

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By Alden Bentley, Samuel Indyk and Ankur Banerjee

NEW YORK/LONDON (Reuters) -The dollar eased from a near eight-week high on Monday, with traders back on alert for intervention to support the yen after the Japanese currency flirted with the 160 per dollar level that had earlier drawn verbal warnings from Japanese authorities.

Dollar/yen topped at 159.94 in early trade, its highest since April 29, when the yen touched a 34-year low of 160.245, leading to Japanese authorities spending roughly 9.8 trillion yen to support the currency.

It briefly tumbled in the European morning to 158.75 per dollar, and was last 0.28% weaker at 159.35.

“Certainly didn’t look like intervention … nonetheless, it does speak to how jittery the market likely is about the prospect for intervention,” said Michael Brown, senior research strategist at Pepperstone.

“I think so long as any further weakness is not especially rapid or disorderly in nature, the MoF (Ministry of Finance) are unlikely to step in just yet.”

Earlier, Japan’s top currency diplomat Masato Kanda said authorities will take appropriate steps if there is excessive foreign exchange movement, and that the addition of Japan to the U.S. Treasury’s monitoring list would not restrict their actions.

The yen has come under renewed pressure after the Bank of Japan’s (BOJ) decision this month to postpone reducing bond-buying stimulus until its July meeting. It is down 1.5% in June.

A summary of opinions at the BOJ’s June policy meeting on Monday showed some policymakers called for raising interest rates in a timely fashion as they saw a risk of inflation overshooting expectations.

The yen, which is highly sensitive to U.S. Treasury yields, is down more than 10% against the dollar so far this year, weighed down by the wide difference between interest rates in Japan and the United States.

“We are all trying to figure out if there is a specific level that the MOF may have in mind in terms of defense or whether or not it comes down to general market conditions,” said Brian Daingerfield, FX strategist at Natwest Markets in Stamford, Connecticut.

INFLATION TEST AHEAD

The spotlight this week will be on Friday’s release of the U.S. personal consumption expenditures (PCE) price index, which the Federal Reserve relies on to gauge progress in getting inflation down to its 2% target.

A number showing price pressures easing is likely to bolster bets on a rate cut as early as September, which futures currently price as a 70% prospect.

The , which measures the greenback against a basket of currencies including the yen and the euro, fell 0.41% to 105.45, edging back from a nearly eight-week high of 105.91 it touched last week.

Another focus through the week will be politics. The first U.S. presidential debate between President Joe Biden and his predecessor Donald Trump is on Thursday after U.S. markets close.

“Certainly there’s quite a bit of interest in whether or not the dollar is specifically mentioned,” said Daingerfield. “We know former President Trump has at times criticized the value of the dollar as being too strong.”

The first round of voting in the French election is on Sunday.

“You’re going to see a lot of defensive positioning going into the first round of the French election and U.S. presidential debate,” said Simon Harvey, head of FX analysis at Monex.

The euro, which has been under pressure since French President Emmanuel Macron called a snap election earlier this month, was up 0.44% at $1.0738 but was still down about 1% in June so far.

France’s far right National Rally (RN) party and its allies were seen leading the first round of the country’s elections with 35.5% of the expected vote, an opinion poll published on Sunday showed.

RN lawmaker Jean-Philippe Tanguy, who is widely seen as the most likely candidate to head the finance ministry if the party wins and forms a government, told Reuters an RN government would stick to the European Union’s fiscal rules.

Sterling strengthened 0.28% at $1.268. The Australian dollar strengthened 0.18% versus the greenback to $0.6651 and the strengthened 0.16%.

© Reuters. U.S. Dollar and Japan Yen notes are seen in this June 22, 2017 illustration photo.   REUTERS/Thomas White/Illustration

Meanwhile, spot yuan was trading at 7.2585 per dollar, close to its lowest in seven months, weighed by broad strength in the dollar and worries about weakness in the world’s second-largest economy. [CNY/]

In cryptocurrencies, bitcoin fell to its lowest since May 10 and was down 4.52% at $61,267.00. declined 5.98% at $3310.26.

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