JPY: Risk of carry unwinding – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank suggests that Yen shorting by overseas speculators is present USD/JPY risk with geopolitical issue in the East Asia.

Key Quotes

“The USD/JPY rebounded to ¥114.49 (Bloomberg) on 11 July. The EUR and CAD gained against USD on the buoyant economies and hawkish bias of the central bank in those regions, but USD itself strengthened against JPY as US economic data remained steady. The markets seemed to confirm the victory of USD/JPY bulls. Still, we lowered our year-end USD/JPY forecast at that time from ¥120 to ¥116. We felt that the USD/JPY would advance only slowly amid repeated range trading until the prospects for a solid US economy and rate hikes became clearer.” 

“The USD/JPY in fact fell again subsequently and is now trading at a range of around ¥110. One surprising development has been the sustained large-scale speculative short yen positions in IMM data. IMM speculators are known for taking technical position-making and would normally be expected to follow the market trend by reducing their yen short positions when the yen appreciates (and the reverse in the opposite situation).” 

“We believe one factor is the increase in yen carry trading. The USD is widely expected to decline in view of the upswing in EUR and CAD, and some emerging and resource nation currencies are expected to gain. That appears to have prompted a buying strategy in these currencies utilizing yen carry in the belief that the BoJ alone among the G3 central banks will maintain its ultra-accommodative stance. We believe the continued high levels of IMM yen short positions amid the falloff in USD/JPY stemmed from the ongoing strength of those currencies against USD.”

“We expect overseas investors to drive USD/JPY markets at ¥115 or higher. However, with speculative yen short positions at this scale, additional yen selling will be limited even if bullish dollar factors should emerge to some extent, leaving little momentum in the markets. A bigger factor at present is the pressure on USD/JPY from concern over geopolitical risk in East Asia, which has brought the rate below ¥110. We are keeping bullish USD/JPY for the medium-term perspective. However, if speculators should be forced to unwind their yen short positions in the thinly traded August markets, it could invite a sudden upward burst in JPY in the short-run.”