The yen’s swoon after Donald Trump’s shock election win has turned the developed world’s strongest currency into its weakest performer. Macro Currency says it has also opened up an enticing buying opportunity.

Mark Farrington, who oversees $2.2bn as managing director at the London-based fund manager, says Japan’s currency is poised to rally because Trump’s policies will spur political risk, reviving demand for the yen as a haven.

The recent rout in Treasuries may also drive Japanese investors back to local bonds. A more “logical level” is around ¥100/$, about 9% stronger than where it is now. That view compares with the median forecast in a Bloomberg poll for the currency to strengthen to ¥105 by mid-2017.

The dollar’s rally after a Trump victory confounded forecasts that such a shock result would spur gains for currencies seen as offering safety, such as the yen, the euro and the Swiss franc.

Instead, speculation the new president will boost spending and quicken inflation, pushing the Federal Reserve to raise interest rates, spurred the steepest selloff in Treasuries since 2009. That surge in US yields saw a gauge of the greenback rise by the most in five years last week.

“The yen so far is only trading on the positive of the interest-rate differential and not the negative of the risk-asset selloff, which is focused on stocks and selective emerging markets,” Farrington said in an interview in Sydney on Tuesday.

“We are very close to the point where it morphs into a full risk-asset selloff. Then the dollar-yen will have a very violent correction. It is going in the wrong direction and should change before the end of the year.”

The company’s macro fund returned 21% in 2015 and is up 10% this year, according to Farrington.

Japan’s currency slid Tuesday to the lowest level since June 2 against the greenback, after the extra yield 10-year US government bonds offer over similar-dated Japanese notes jumped this week to the highest in almost three years.

The dollar’s climb from ¥101 to ¥109 in less than a week also was rapid enough to signal that the pace of gains was excessive, the first time that’s happened this year. The greenback jumped 4% this month to ¥109.03 as of 14:00 in Tokyo on Wednesday.

The yen’s drop since October 31, the largest among 10 major developed peers, has trimmed its advance in 2016 to 10%. That remains the strongest performance across the group.

Macro Currency sees the yen trading at ¥95 to ¥105/$, expecting the currency will be among the main gainers under President Trump, along with gold. It would be a “strong-seller” of dollar-yen at current levels and doesn’t see the pair breaching ¥110, Farrington said.

The global debt market selloff on Trump’s election last week wiped a record $1.2trn off the value of bonds around the world and took the benchmark 10-year US bond yield to its highest closing level this year.

The rout that put global bonds on track for their worst month in 13 years paused Tuesday with a technical indicator showing 10-year Treasuries were the most oversold Monday in 26 years.

A continued increase in Treasury yields or a steep move up in Japanese government bond rates will push Japanese pension funds and insurance companies to invest in local bonds, boosting the yen, Farrington said.

While the US benchmark yield has surged 36 basis points since Trump’s election win, 10-year Japanese government bond yields rose just seven basis points, capped by the Bank of Japan’s bond purchases.

The increase in US yields “will force Japanese institutional investors to restructure their portfolio between now and the end of March,” he said. “If the long end of the JGB yield curve were to pop up, then there would be pretty strong incentives to rotate back to Japanese bonds.”

Nov 16 2016 09:35


Narayanan Somasundaram