Yen slumps as traders maintain bearish bets

26 Mar 2024 , 03:16 PM

As investors sought higher returns almost everywhere except Japan, where they expected that interest rates would remain around zero for some time, the yen fell to new lows this week against the euro, pound, and other crosses and was on track for a fourth weekly decline against the dollar.

With a 6.4% decline against the dollar, the yen is the least performing G10 currency this year. The best-performing currency is the US dollar.

The yen is down 0.6% against the euro for the week, and it hit its lowest level in three months overnight at 163.45 per euro. It fell by the same amount on the pound to reach 190.83, its lowest since late 2015, and recorded a nine-year low on the Australian and New Zealand dollars.

Because of the possibility that the yen’s decline would lead to Japanese intervention in the markets, the yen’s movements against the dollar were more restrained. In recent days, officials have reminded traders to be prepared.

This week, the dollar increased by 0.1% to trade at 150.41 yen. Little moves were made early in Friday’s Asia session.

By borrowing yen at zero percent and purchasing income-producing assets in other currencies, investors can profit from carry, or interest.

The move is beneficial because markets are retreating from their bets on significant rate reduction in the United States, Europe, and Britain, which would raise yields. Deutsche Bank’s foreign currency volatility index has fallen to two-year lows.

The yield difference between US and Japanese government bonds at the two-year tenor is greater than 450 basis points. According to positioning data, yen shorts increased last week.

In other places, the Australian and New Zealand dollars gained value due to the flow towards currencies with greater yields. The kiwi surged beyond 62 cents overnight and closed at $0.6197, despite dismal retail sales data, which speculators are using to gauge the likelihood of an interest rate hike by the central bank next week.

This week, the Australian dollar has been gradually rising beyond its 200-day moving average. On Friday, it increased by 0.1% to $0.6563, marking the biggest weekly rise in the past two months of 0.5%.

Due to a consistent decrease in the amount of interest rate cuts anticipated this year—markets are currently pricing in approximately 90 basis points of reductions from over 160 at the end of 2023—the euro is also poised for its biggest gain in two months.

The case for caution in rate cuts was strengthened by stronger-than-expected purchasing managers’ surveys that were released overnight.

At last, the euro bought $1.0836. At 103.91, the U.S. dollar index had a 0.3% weekly decline. At $1.2658, sterling was up 0.5% for the week.

Since the lunar new year holiday, China’s yuan has steadily appreciated; this week, it scarcely moved at 7.1937 per dollar, despite sharp drops in Chinese mortgage rates.

Speeches made later in the day by central bankers, such as Fed Governor Christopher Waller and President Christine Lagarde of the European Central Bank, will be widely observed.

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