Yen Beating G-10 Peers Has Asset Managers Betting on More Gains

The yen’s advance versus the dollar this year has more legs, if positioning by asset managers is any guide.

While Japan’s currency hasn’t really delivered a blowout rally, it has risen every month in 2020, with its 1.5% increase making it the sole gainer among Group-of-10 exchange rates. And the slow yet steady performance seems to have emboldened real-money funds to raise their bullish bets.

The funds have boosted their net long yen positions for five straight weeks, taking them to 47,181 contracts in the period ended May 12, the highest since November 2012, according to the latest data from the U.S. Commodity Futures Trading Commission.

The haven currency has found appeal amid the global market turmoil spurred by the coronavirus pandemic and also benefited from expectations that the Federal Reserve’s unprecedented monetary easing and steps to boost dollar supply will weaken the greenback.

While these two catalysts are still in play, concern about a resurgence in U.S.-Chinatensions over the source of the virus outbreak is emerging as another trigger for investors to seek safety in the yen.

“A major risk-off factor is that this is a presidential election year, which could prompt Trump to go hard on China,” said Ko Haruki, head of the financial solutions group at CIBC World Markets in Tokyo. “While risk-off can boost both the dollar and yen, factors related to U.S.-China trade frictions tend to put a stronger upward pressure on the yen compared with the dollar.”

The dollar-yen pair is also seen weighed down by the U.S. money markets’ pricing for the possibility of the central bank cutting interestrates below zero next year. Whilewarning of economic risks from the pandemic, Fed Chair Jerome Powell last week said such a move wasn’t being considered, though he stopped short of completely ruling out negative rates as an option in the future.

“Persistent positioning to short USD/JPY by non-Japanese players suggests they are focused on U.S. dollar weakness over the longer term because few can be optimistic about the prospect of theU.S. economy,” said Haruki.

Technical indicators are signaling that risks remain skewed for the dollar-yen to test the 105 mark soon as the currency pair grinds its way lower within a shallow bear channel. It ended at 107.06 on Friday.

Investors will watch if Japan growth data due Monday — which is likely to show that the economy has slipped into deep recession — has any meaningful impact on the yen.Analysts see the economy shrinking at an annualized pace of 4.5% in the first three months of this year.

Below are the key Asian economic data and events due this week:

  • Monday, May 18: Japan 1Q GDP; New Zealand performance services index; Singapore non-oil domestic exports; Thailand 1Q GDP
  • Tuesday, May 19: RBA minutes, Australia weekly payroll jobs and wages; New Zealand 1Q PPI input/output; Japan industrial production; Bank Indonesia rate decision
  • Wednesday, May 20: Australia skilled vacancies and preliminary retail sales; New Zealand food prices; Japan core machine orders; Bank of Thailand rate decision; China 1-year and 5-year loan prime rate; Malaysia CPI
  • Thursday, May 21: RBA’s Lowe speaks; New Zealand credit card spending; Japan trade balance and Jibun Bank PMIs; South Korea PPI and 20-day exports/imports
  • Friday, May 22: New Zealand 1Q retail sales ex inflation; Japan CPI, Thailand customs trade balance

— With assistance by Chikako Mogi

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