(Bloomberg) — Japanese retail investors are betting on a further rally in the yen even as it retraces some of the gains made in the past two weeks.
Net yen long positions held by individual traders against 14 foreign currencies via futures stood at ¥431 billion ($2.9 billion) as of Monday, up 22% since the Bank of Japan’s rate hike late last month, according to Tokyo Financial Exchange Inc. data compiled by Bloomberg. That puts them close to the record ¥501 billion reached in April.
These bullish positions signal a strong conviction among retail traders that the rally in Japan’s currency has more legs, given these bets stand to incur losses resulting from the still-wide yield differentials between Japan and other economies. Yen bulls have also been energized by prospects for Federal Reserve policy easing and heightened market volatility that scared off carry traders.
“The theory is to sell yen and buy other currencies because of interest-rate differentials, but this is difficult to do in a situation where market stability hasn’t found a strong enough footing,” Takuya Kanda, head of research at Gaitame.com Research Institute in Tokyo, said of carry trades. The risk of a drop in stock prices also tends to drive up the yen against other currencies, he said.
Japan’s currency traded little changed at 146.88 against the dollar as of 7:15 a.m. in Tokyo. It’s fallen about 4% since touching a seven-month high of 141.70 last week.
Read: BOJ Sends Dovish Signal After Rate Hike Spurred Market Meltdown
The bulk of yen long positions were against the dollar, followed by the pound and the Swiss franc. Japanese retail accounts still held yen shorts against high-yielding currencies such as the Mexican peso and Turkish lira, although these have been greatly pared back in the past two weeks.
Yen positions held on Tokyo Financial Exchange are part of a larger pool of money that retail investors plow into currency markets. Foreign-exchange trading by individuals accounted for almost a quarter of entire currency transactions in Tokyo last year, according to a report from the Financial Futures Association of Japan.
“It seems the yen has entered a far more constructive environment, which should allow its extreme undervaluation to be corrected over time,” Gareth Berry and Thierry Wizman, strategists at Macquarie Group Ltd., wrote in a research note this week. The yen may rebound to 125 per dollar by the end of next year, “but the odds of it happening much sooner are rising,” they said.
©2024 Bloomberg L.P.
