(Bloomberg) — “Sell Japan’s currency” is becoming an ever-more popular rallying cry as investors prepare for monthly US inflation data that threaten to roil financial markets.
The Asian nation’s biggest banks are almost unanimous in saying the yen is set to keep weakening as traders trim bets on Federal Reserve interest-rate cuts, bolstering the dollar and Treasury yields. The outlook for further yen losses is emboldening traders to reload bearish positions on one of the easiest currencies to sell in the event of a hot US inflation number.
“‘Sell the yen’ is by far the most popular trade — the carry still works for hedge funds shorting the currency,” said Nick Twidale, chief analyst at ATFX Global Markets in Sydney, who’s traded the yen for a quarter of a century. “Given doubt on the size of Fed rate cuts, it’s just easier for investors to be biased short yen right this moment.”
Japan’s currency is the third-most traded in the world behind the dollar and euro, and the ample liquidity makes it easy for investors to buy and sell. The yen has already weakened for three straight years as the nation’s relatively low interest rates have made it an ideal target for so-called carry trades, where investors borrow in low-yielding currencies to fund purchases of higher-yielding assets elsewhere.
Mizuho Securities Co., Nomura Securities and MUFG Bank Ltd. are among those saying there’s a risk the yen will weaken to 150 per dollar or beyond, raising the threat of renewed intervention from the authorities. The currency’s 4.5% decline over the past month is already putting officials — and yen traders — on high alert.
If US CPI beats forecasts, there’s a risk of a general rise in the dollar, Yujiro Goto, head of foreign-exchange strategy at Nomura Securities in Tokyo, wrote in a research note. “There’s also a high possibility that the dollar will attempt to recover to the 150 yen level.”
WATCH: Why Japan’s Currency Is So Volatile
Signs of unease from Tokyo are growing. Japan’s chief currency official Atsushi Mimura told reporters Monday he was monitoring the currency market with a sense of urgency. Sudden yen moves can have a negative impact on business activity and citizens’ lives, newly appointed finance minister Katsunobu Kato said the same day.
The yen was little changed at 149.13 per dollar Thursday in Tokyo after earlier weakening to an almost two-month low of 149.55. The currency last traded at 150 on Aug. 1.
Much of the yen selling pressure is being driven by the prospect of a stronger dollar.
“It’s not just the yen, I think is the simple answer — so, very much a US dollar focus rather than yen focus at the moment,” said David Sokulsky, chief investment officer at hedge fund Carrara Capital in Sydney. “The easiest trade is to be short yen.”
Economists predict key measures of US inflation may have slowed in September, even as price pressures build in some categories of goods such as used cars. The expectations for a subdued reading leaves an even greater room for an upside surprise.
What Bloomberg Economists Say…
“Stronger-than-expected US jobs data have helped create a favorable environment for yen carry trades to resume.”
Taro Kimura, senior Japan economist for Bloomberg Economics
The yen “will probably suddenly go to the 150 level” if the CPI data is very strong, said Tsutomu Soma, a bond and currency trader at Monex Inc. in Tokyo. “But I think it’ll come back down quickly because of the sense of caution about intervention.”
In Singapore, hedge fund Blue Edge Advisors is also eyeing further yen weakness into the US data.
“Until all of that positioning washes out or data softens, the path of least resistance, although volatile, is higher US rates,” said Calvin Yeoh, who helps manage the Merlion Fund. “And that means it’s about a stronger dollar, weaker yen.”
(Updates to add explanation of carry trades in fourth paragraph.)
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