MARKET NEWS
Investors scramble to get out of the way of the rising yen - REUTERS
SINGAPORE, Aug 1 (Reuters) - A dramatic rally in the yen is tapping one of the most powerful forces in markets: momentum. And as trend-followers who rode the currency's slide to a 38-year low start to flip their bets, investors of all stripes are rushing to get out of the way.
The yen is up 8% on the dollar in three weeks and the speed of the rally has caught market participants off guard.
Funds and trend-following commodity trading advisers (CTAs), who took short positions in calmer times, face losses or at least a new risk calculus, as the yen has sharply retraced a slide that took it from 140 a dollar in January to 161 in July.
At about 150 to the dollar on Thursday, about half the year's paper-gain for yen shorts is gone and the volatility leaves the position less and less comfortable by the day.
With policy meetings in the U.S. and Japan done, and confirming opposite trajectories for interest rates, analysts and dealers say leveraged players' next move will drive the currency market, and that probably means more gains for the yen.
"It's really the price action that drives dollar/yen," said James Malcolm, macro strategist at UBS.
And with trend-followers all picking up the same signals from the market shift, an already big move can get even bigger - and fast.
"Sub-152, a lot of these triggers begin to come in for CTAs, not just reducing the dollar longs," he said. "But actually starting to turn short dollars in dollar-yen."
Being short the yen, whose short-term yields had been anchored at zero since the start of the century, was the world's juiciest currency trade for years - all the more so while the yen steadily declined and forex volatility (.DBCVIX) was low.
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Now the factors underpinning the assumption that the yen would stay both cheap and stable are suddenly shifting.
A rising stock market (.N225) is encouraging more Japanese to bring money back home, and the trade deficit has narrowed. Japanese investors have withdrawn a net 2.2 trillion yen ($15 billion) from foreign equities so far this year, a larger sum than the net 621.2 billion yen investment flows to foreign bonds, according to official data.
At the same time, within four months the Bank of Japan has hiked rates twice and dismantled a policy of capping yields that had acted as a safety-net for short yen positions by ensuring that its interest rates stayed at rock-bottom. "We remain convinced that the past two years of yen weakness does not represent a structural shift; the sell-off is cyclical in nature and fully reversible," said Macquarie strategist Gareth Berry, who forecasts dollar/yen at 125 by the end of 2025.
