Yen sinks as currency traders keep short and carry on

A banknote of Japanese yen is seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration/File photo

SINGAPORE  —The yen sagged to fresh lows on the euro, sterling and other crosses this week and headed for a fourth weekly drop on the dollar as investors chased better yields just about everywhere but Japan, wagering rates there would stay near zero for some time.

The yen is the worst-performing G10 currency this year, with a 6.4-percent slide on the dollar. The greenback is the best performing.

For the week the yen is down 0.6 percent on the euro, touching its weakest for three months overnight at 163.45 per euro. It dropped by the same margin on sterling to hit its lowest since late 2015 at 190.83 and made nine-year nadir on the Australian and New Zealand dollars.

Yen moves against the dollar were more modest due to the risk its slide could prompt intervention in markets from Japan, with officials reminding traders they stand ready in recent days.

READ: Japan warns against rapid, speculative yen falls

The dollar gained 0.1 percent to trade at 150.41 yen this week. Moves early in Friday’s Asia session were small.

Investors can earn interest, or carry, by borrowing yen around 0 percent and buying income-bearing assets in other currencies.

With Deutsche Bank’s foreign exchange volatility index collapsing to two-year lows and markets backpedaling on bets for deep rate cuts in the U.S., Europe and Britain – leaving yields elevated – the trade is profitable.

“There’s a focus on carry while we’re in a range-bound environment,” said Bank of Singapore strategist Moh Siong Sim, noting that hopes for a yen rally had taken a hit from last week’s data showing an unexpected slide into recession in Japan.

“We’re at a point where there is not a whole lot of conviction in the currency world,” he said, adding that carry trades did not seem “that compelling a story…other than for the carry itself”. That seems motivation enough for investors.

At the two-year tenor, the gap in yield between Japanese and U.S. government bonds is more than 450 basis points. Positioning data shows yen shorts jumped last week.

High-yielding currencies

Elsewhere the flow into higher-yielding currencies helped lift the Australian and New Zealand dollars. The kiwi topped 62 cents overnight and last bought $0.6197, shrugging off weak retail sales data as traders weigh a possibility that the central bank hikes interest rates next week.

The Australian dollar, which has edged above its 200-day moving average this week, rose 0.1 percent to $0.6563 on Friday for a weekly gain of 0.5 percent, its largest in two months.

READ: Dollar dips, data stays in focus for Fed clues

The euro is set for its largest gain in two months as well on the back of a steady reduction in the scale of interest rate cuts expected this year, with markets now pricing about 90 bps of cuts from about 160 at the end of 2023.

Stronger-than-expected purchasing managers’ surveys out overnight added to the case for caution in cutting rates.

The euro last bought $1.0836. The U.S. dollar index was down 0.3 percent for the week at 103.91. Sterling was up 0.5 percent on the week to $1.2658.

China’s yuan has made a steady return since the lunar new year break, barely moving this week at 7.1937 per dollar despite steep cuts to Chinese mortgage rates.

Later in the day, central banker speeches including from European Central Bank president Christine Lagarde and Fed Governor Christopher Waller will be closely watched.