Yen sinks as currency traders keep short and carry on

© Reuters. FILE PHOTO: A banknote of Japanese yen is seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration/File Photo

By Tom Westbrook

SINGAPORE (Reuters) – The yen sagged on the euro, sterling and other crosses this week and headed for a fourth weekly drop against the dollar on Friday as investors chased better yields just about everywhere else, wagering Japan’s rates would stay near zero for some time.

The yen is the worst-performing G10 currency this year, with a 6.3% slide on the dollar. The greenback is the best performer.

For the week the yen is down 0.6% on the euro, touching its weakest for three months on Thursday 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 nadirs on the Australian and New Zealand dollars. [AUD/]

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.

The dollar gained 0.2% to trade at 150.53 yen this week. Moves in Friday’s Asia session were small and trade lightened by a public holiday in Japan.

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

With Deutsche Bank’s foreign exchange volatility index collapsing to two-year lows and markets backpedalling 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.”

For now, 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.

Federal Reserve Governor Christopher Waller said on Thursday U.S. policymakers should wait for a few more months of inflation data before moving interest rates.

Elsewhere, the flow into higher-yielding currencies helped lift the Australian and New Zealand dollars. The kiwi topped 62 cents and last bought $0.6202, 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 0.2% to $0.6570 on Friday for a weekly gain of 0.6%, its largest in two months.

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 basis points 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 $1.0823. The U.S. dollar index was down 0.4% for the week at 103.91. Sterling was up 0.5% on the week to $1.2664.

China’s yuan has made a steady return since the Lunar New Year holiday break, barely moving this week at 7.1959 per dollar despite steep cuts to Chinese mortgage rates.

European Central Bank president Christine Lagarde and board member Isabel Schnabel are due to make public appearances later on Thursday.