When the going gets tough, foreign-exchange traders turn to the yen.
Japan’s currency may extend its biggest two-week rally since 1998 as investors continue to seek out refuge assets amid market turmoil, according Citigroup. State Street Global Advisors, which oversees about $2.4tn, says it’s buying yen and selling dollars as the tumult gripping financial markets bolsters the Japanese currency’s appeal.
“We’re not counting on the market mood shifting any time soon,” said Steven Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy.
Citigroup, world’s biggest foreign-exchange trader according to Euromoney magazine, expects haven currencies including the yen, euro and Swiss franc to appreciate in the near term, even though it said investors are being overly pessimistic about the prospects for economic growth in the US and monetary stimulus elsewhere.
The yen has defied predictions to weaken this year while its biggest counterpart, the dollar, has upended forecasts for gains. Currency traders are questioning the idea that the US economy is strong enough for the Federal Reserve to raise interest rates while central bankers in Tokyo and Frankfurt consider adding to stimulus.
Japan’s currency rose 3.2% last week to 113.25 per dollar, adding to last week’s 3.7% gain. Its strength contrasts with a median forecast for the currency to drop to 123 against the dollar by the end of the year, according to analysts surveyed by Bloomberg.
Global equities fell into a bear market last week, and commodities declined, amid growing signs that central-bank policy tools were losing their stimulative effects.
Fed Chair Janet Yellen signalled financial-market volatility may delay rate increases as the central bank assesses the impact of recent turmoil on domestic growth.
“This little risk episode might have a bit further to run,” said Collin Crownover, head of currency management at State Street in Boston. “We’ve actually been riding a very long yen position for a few months now.”
Hedge funds and other large speculators increased net bullish bets on the yen to 43,232 contracts in the week ending February 9, data from the Commodity Futures Trading Commission show. That’s up from 37,245 a week earlier and near a more than three- year high reached in late January.
“It’s the muscle-memory response around risk off” to buy the yen, said Greg Peters, a senior investment officer at Prudential Financial Inc’s fixed-income unit in Newark, New Jersey. “That’s not going to change, necessarily, until the overall environment changes.”
Related Story