Yenccentric move

Many were taken off guard by the Yen’s counter-intuitive move following the BoJ’s March meeting. For the first time since 2007 the bank decided to raise interest rates. Normally this would be expected to strengthen a currency substantially, especially after such a long delay. Yet in the case of the Yen, the opposite was true. 

Some put it down to the move being too widely telegraphed prior to the meeting, causing a “buy the rumor sell the fact” trade, whilst others suggested the Yen fell because the rate hike was a case of a “one and done”. 

Japan’s FX chief Masato Kanda put the Yen’s eccentric devaluation down to speculators playing a contrarian trade to make a quick killing. Indeed, data from the Commodity Futures Trading Commision (CFTC) shows large speculators such as hedge funds loading up their short bets on the Yen in the week of the BoJ decision. 

Eventually, the explanation that seems the most reasonable is that despite the rise in Japanese interest rates from negative 0.1% to a range between 0.0% and plus 0.1%, they remain extremely low in comparison to other countries. This means the Yen still “remains the most popular funding currency for carry trades,” according to FX strategists at ING. 

The carry trade is an operation by which traders borrow in a “funding currency” such as the Yen, to buy a currency with a higher interest rate, such as the New Zealand Dollar (5.5%) or US Dollar (5.5%).The profit lies in the difference between the cost of the  interest repayments and the interest earned at the higher rate – assuming a constant exchange rate.