Foreign Currency

Point72’s Drossos Says Japan Disrupting One-Way Bets Against Yen

(Bloomberg) — By one measure, according to Point72’s Sophia Drossos, Japan’s intervention to prop up the yen has achieved a key objective: Preventing the market from piling into lopsided bets against the currency.

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The economist and strategist at the asset-management firm said the moves have made investors wary of wagering that the currency will keep weakening — given the risk of being caught offsides if officials swoop in to start buying the currency again.

“Authorities have stepped in to counteract what has become a one-way market in the end — and they are using the element of surprise to their tactical advantage,” Drossos, who once oversaw open market operations at the New York Fed, said in an interview. “The volatility might just be too much right now for investors to stomach.”

On Wednesday, Japan appeared to conduct its second currency intervention this week, with the yen jumping as much as 3% during later afternoon trading in New York. The currency extended the gains into Thursday, when it rose as much as 1% more before paring the advance.

And on Friday, the yen climbed again to touch the strongest level in three weeks. The move helped to drag dollar weaker, with a Bloomberg gauge measuring the greenback’s strength falling for a third straight day.

Authorities in Japan have not confirmed if they have stepped in to the FX market to prop up the currency, but the widespread speculation that they did has at least temporarily halted what had been a steep slide in the yen.

Read More: Japan Likely Spent About $23 Billion in Latest Yen Intervention

Until the turnaround this week, the yen had tumbled sharply against the dollar since late December. Positions betting it would weaken had risen to the highest since at least 2006, according to Commodity Futures Trading Commission data.

The driver has been the vast interest-rate differential between the US and Japan. The Federal Reserve had signaled fresh concerns about inflation, pointing to the possibility of US rates remaining elevated for longer even if hikes are unlikely. That’s given Japanese investors a continued incentive to shift cash to the US.

After the Fed meeting, investors are now focused on the monthly payrolls report on Friday. If the number comes in strong, then the work that Japanese authorities did this week “is probably not going to be sufficient to hold the yen,” Drossos said.

“But if it’s a weak number, the Bank of Japan and the Ministry of Finance might have the wind at their back in terms of the intervention,” she said. “There’s just a lot of uncertainty.”

–With assistance from Carter Johnson.

(Adds yen and dollar moves on Friday.)

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