Investors in Japan’s yen have jumped at what they see as the clearest sign yet from the country’s monetary authorities that the end of ultra-low interest rates is fast approaching, opening the floodgates to a rush of buyers.
The yen surged over 2 per cent to a multi-month high against the U.S. dollar on Thursday after Bank of Japan Governor Kazuo Ueda said policy management would “become even more challenging from the year-end and heading into next year” and flagged several options for what could come next.
On Wednesday, Deputy Governor Ryozo Himino had discussed the potential impact an exit from ultra-loose monetary policy could have on the economy.
Their combined comments lit a fire under the battered yen, which was set for its biggest one-day gain versus the dollar since January. Five-year Japanese bond yields witnessed their most aggressive sell-off in a decade.
“On the yen side there has been a bit of a frenzy,” Olivier Marciot, Unigestion head of investments multi asset, said.
Just four weeks ago, the yen languished around the 150 mark, near its weakest in 30 years, and markets were on edge over potential central bank intervention to prop up the currency.
The BOJ has been the lone holdout as other big central banks have hiked rates from zero to fight a surge in inflation.
Much action in currency markets this year have been a function of the dollar and U.S. rate expectations.
Yet Thursday’s stellar yen rally now adds to a growing conviction that Japan’s currency, down almost 10 per cent this year, is poised for a stronger 2024.
Commonwealth Bank of Australia sees dollar/yen falling below 140 next year, while ING expects the currency pair to move to 130 by end of 2024. It was last trading at around 145.
The yen also rose 2 per cent against sterling, the most in a day in almost a year, while against the euro, it headed for a ninth straight gain – the longest such streak since 2017.
Expectations are growing that the BOJ will soon signal a winding down of its ultra-low rates policy, in place since 2016, and its Dec. 18-19 meeting could provide an opportunity.
“There are various options. But we have not made a decision yet on which interest rate to target once we end our negative interest rate policy,” Mr. Ueda told parliament on Thursday.
City Index analyst David Scutt said the choice of wording – “once,” not “if,” suggested the BOJ was committed to normalizing policy, most likely around April.
Ed Hutchings, head of rates at Aviva Investors in London, said the BOJ comments suggested the December meeting would be watched closely as an indication of what happens in January.
“It’s likely they would give a one-month lead up into any formal action on policy,” he said.
With focus now on the December meeting, trader demand for options to hedge risk for that date surged, even if an outright rate hike is viewed as unlikely.
One-week options volatility – a measure of demand for a particular derivative that expires in a week – spiked by the most in five months to its highest since July.
“The BOJ would prefer to hike when they release new projections and that won’t happen in December,” ING strategist Francesco Pesole said. “Now, there’s just growing interest in not missing the hike, so markets are quite jittery when it comes to dollar/yen.”
Part of the force behind the yen’s snap higher was an unwinding of large, long-held bearish positions, analysts said.
Ever since other major central banks, such as the Federal Reserve embarked on hiking rates, speculators have amassed large holdings of short yen positions – ones that become increasingly valuable as the currency depreciated against the dollar.
Latest weekly data from the U.S. markets regulator shows speculators hold a net short yen position worth $10 billion, compared with a net long worth $3.4 billion in early 2021.
With the prospect of the longed-for policy shift from the BOJ possibly moving into view, yen bulls rushed out in force, upping the rally’s momentum.
“The market is very, very heavily short the yen and we’ve got a heavy consensus in for 2024 that this is going to be the year that they bring negative rates to an end,” said TraderX strategist Michael Brown.
“It shows the market is ready to latch on absolutely anything that it can in light of that.”
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