Written by Neil McKenzie
LONDON (Reuters) – Pressure on Japan to support a weak yen may have eased, but the currency's weakness remains a headache for Tokyo.
The yen has fallen 9.4% against the dollar so far this year, and appears poised for a fourth year of declines. This has created a two-speed economy, where exports and tourism benefit from a more competitive exchange rate while households and small businesses are pressured by rising import prices.
Four investment managers shared four ideas on how to trade yen weakness. Their views do not represent recommendations or trading positions, and they cannot be disclosed for regulatory reasons.
1/ Florin Court Capital
* Diversified, systematic asset manager
* Size: $2 billion in assets under management (AUM)
* Established in 2016
*Main trade: Short Asian currencies excluding Japan
Instead of playing with a weak yen, investors should place bets against emerging market currencies in Asia, says Doug Grainge, CIO at Florin Court.
“Investors could consider shorting other Asian currencies such as the Korean won or Thai baht, where real interest rates are also relatively low against some other emerging market currencies,” Court said. “And you don't directly face the risk of Bank of Japan intervention.”
It is believed that the Bank of Japan intervened twice, on April 29 and May 1, to stabilize the yen, which fell to its lowest levels in 34 years at 160 yen to the dollar. It is now about 155.6.
The yen has fallen sharply for obvious reasons: real interest rates are much higher outside Japan.
US interest rates have remained high thanks to loose fiscal policy and a strong economy. By contrast, Japan is not free to raise interest rates, Greenig said.
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He added that Japan's huge public debt pile amounts to 263% of GDP, but the Bank of Japan holds nearly half of that, so the situation may be more nuanced than it appears.
2/ Aqar Capital Management Company
* Systematic asset manager
* Size: $108 billion
* Established in 1998
* Long Japanese stocks
The Bank of Japan's intervention complicates matters for yen bulls, but the main driver of the yen's weakness remains – Japan's accommodative monetary policy while interest rates elsewhere are at record highs, says Jonathan Fader, managing director in the Macro Strategies Group at AQR Capital Management. Several years ago.
He prefers Japanese stocks that benefit from currency weakness.
Fader noted that the close relationship between the yen and Japanese stocks has broken down as Tokyo intensifies verbal intervention. But tailwinds for stocks remained, such as governance improvements and banks benefiting from the end of negative interest rates.
The Bank of Japan in March made its first interest rate hike in 17 years.
“If yen volatility subsides, Japanese stocks could resume outperformance,” Fader said.
Japan's blue-chip stocks have surpassed their record highs set earlier this year, but are still up about 16% year to date.
3/ Jabal Lucas Administration
* Macroeconomic hedge fund
* Size: $1.5 billion
* Established in 1986
* USD/JPY forward
For David Asbell, partner at Mount Lucas, the large interest rate gap between the US and Japan means investors will continue to use the yen as a financing currency for carry trades.
He said that one way to exploit the weak yen is through currency futures contracts, which are contracts that allow investors to hedge foreign currency risks.
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Buying a one-year USD/JPY futures contract that is trading at a discount to current levels means the currency pair would need to double over the course of a year to lose money, Aspel said. Investors will profit if there is no change or if the USD/JPY price rises.
“An intervention has the best chance of success in the medium term when it is a real surprise and when the fundamentals help it,” Asbell said.
4/ Bainbridge Investments
* Global Asset Manager
* Size: $168.2 billion
*Independent since 2010
* Purchasing high quality investment grade parts on short term, refinancing 2024 collateralized loan obligations in the US
The Bank of Japan also gave up control of the yield curve as it set long-term interest rates around zero, but said it would continue to buy government bonds as extensively as before and step up purchases if yields rise quickly.
Since the start of the policy in 2016, Japanese investors have sought higher returns elsewhere. The 5% excess returns on investment grade tranches (portions) of collateralized loan obligations in the United States have attracted a lot of people.
“Right now, as investors in collateralized loan obligations, they are our competitors because they have strong demand for U.S. fixed income assets,” said Leila Kohlmorgen, managing director of PineBridge, adding that what Japanese investors do will determine how Pinebridge invests later in the year.
Now that Japanese government bond yields are at their highest levels in a decade, this may tempt Japanese investors to bring their money back home.
“We have to stay smart,” Kohlmorgen says.
While the typical CLO deal duration is eight years, it will elect to reset the newly collateralized loan obligations in 2024. In this case, the deal time has been restarted. You will be looking for an extended reinvestment period of three years, refinancing the debt and protecting the lender from paying off the bonds in full within the first year.
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