Is Japan’s Yen Unravelling As A Safe-Haven Trade?

In the aftermath of a US proposal for an additional 10 percent tariff on $200bn of Chinese goods, the Japanese currency has dropped steeply against the US dollar, suddenly abandoning the ¥110 per dollar mark last Tuesday to trade in the ¥112 zone on Thursday.

The movement, say, traders and technical analysts, is important: not because of the volatility – although the move breaks a chapter of relative peace – but because of the trend.

That the yen has not been strengthening steadily into the past few weeks of rising trade war rhetoric is now frequently characterized as phenomenal. Under ordinary extraordinary circumstances, they might rationally expect the yen to rise against the US dollar when things turn economically or geopolitically hairy. Some like to interpret the pattern as a “safe haven” trade — a classic market reaction to an onset of global risk-off bias.

Everything about the current situation seems both painful to ignore as a trading signal, equities, for example, have taken the hint, and to portend a big safe haven trade on the yen. Not that Japan can be especially sanguine about a US-China trade war – almost every piece of analysis on the subject projects collateral damage for Japan.

There are two conceivable interpretations for the resilience of dollar-yen in 2018 as various red flags have waved. The initial is that Japan’s pension funds have returned, after a two-year absence. They are now such large buyers of foreign equities they are jointly holding the yen down even as more structural forces might normally cause it to appreciate.

A possibly more considerable part of this narrative, however, is the behaviour of Japan’s Government Pension Investment Fund (GPIF) – the world’s largest – which appears to have returned as a buyer of foreign equities in the April to June quarter. Behind that movement is a memorandum to the market. At the end of March, the GPIF’s holdings of short-term assets (mainly cash) hit $125bn. A segment of this so-called “dry powder” was invariably expected to find a home at some point, and the foreign equity is widely judged to be the direction it is most feasible to be deployed, continuing downward push on the yen.

But there is another, gradually developing, explanation for the recent behaviour of Japan’s currency, with that recent, logic-defying dip at its centre: the market may have decided that the yen is no longer a safe haven for these times. Since the start point of the year, when the trade war decibels increased, a broad range of global funds have employed long positions in the yen as a hedge against emerging market risk. The yen’s health into any given EM wobble seemed so solid that major yen long positions were built up from about February onwards.

In the event that trade has not worked and the more it has failed to work in the face of deepening trade war fears, the more the global funds have come under pressure to trim or unwind the long yen positions.

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