Traders are increasingly betting that Japanese prime minister Shinzō Abe will not follow through on his plans to do whatever it takes to defeat deflation in Japan (or that he has already done enough and won't do any more).
Bets on Yen Hit Three-Year High
Currency futures show Bets on Yen Strength Climb to Three-Year High.
US Dollar / Yen Monthly
Bets the yen will strengthen climbed to the highest level in three years as concern global growth is slowing spurred demand for the relative safety of Japan’s currency.
Hedge funds and other large speculators boosted net long positions on the yen to 25,266 contracts in the week through Jan. 12, the most since October 2012, based on futures. Japan’s currency rose to the strongest since August versus the dollar last week as a slump in stocks around the world and signs China’s economy is losing momentum pushed back expectations for the Federal Reserve’s next interest-rate increase.
“I can’t see the exit from this tendency toward risk aversion,” Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., a margin-trading services provider, wrote in a note to clients. “The drop in stocks and yen currency crosses will continue to weigh on dollar-yen.”
Switch in Sentiment
At the start of 2012 the Yen traded at 76.23 to the dollar. It's now at 117.48 to the dollar. That's a decline of 35%.
In May, the Yen hit a low of 125.86 to the dollar. Since then, sentiment on the Yen switched wildly as shown by currency bets.
Japanese GDP Revised to Growth
On December 8, the Financial Times reported Japan GDP Revised From Recession to Growth in Q3.
Growth for the third quarter was revised on Tuesday from an annualised fall of 0.8 per cent to an annualised rise of 1 per cent, erasing the technical “recession” declared just three weeks ago.Yen a "Safe Haven"?
Investment was the main force behind the revisions: it was amended from a quarter on quarter fall of 1.3 per cent to a rise of 0.6 per cent. Instead of subtracting 0.7 percentage points from annualised growth, therefore, it added 0.3 percentage points.
“As a result of annual revision to the past data, the entire trajectory of inventory investment since 2013 was revised up significantly,” said Ryutaro Kono at BNP Paribas in Tokyo. “This is not great news for growth in coming quarters.”
Is the Yen now a safe haven?
Apparently traders think so. I don't. Japan will not decouple from the global economy.
And on the next downturn in Japan, Abe is likely to try anything. In the meantime, as long as Abe does not see need for further stimulus, the Yen may have further to run.
With all the currency traders suddenly believing in Abenomics, a swing back to the other side could produce significant currency moves the other way.
Mike "Mish" Shedlock