The background and future trend of active yen financing currency trading
2024-06-04
■ The activity of this Japanese yen financing currency transaction is mainly influenced by factors such as the rise of European and American stock markets and the improvement of economic indicators.
■ In June, a financial policy conference will be held between Japan, the United States, and Europe, impacting the trend of yen financing currency trading.
Since mid-May, we have witnessed a notable surge in yen financing currency trading. A unique characteristic of this period is that the Japanese authorities maintained their vigilance regarding intervention, and the rise of other cross-yen exchange rates became a prominent feature. For instance, the euro/yen exchange rate is nearing its historical high of 171.42 yen on April 29, the pound/yen exchange rate is at its highest level since August 2008, and the New Zealand dollar/yen exchange rate remains at its peak since July 2007.
It is generally believed that yen financing currency transactions need to meet three conditions: (1) an increase in investor risk appetite, (2) a high level of interest rate spread, and (3) a decrease in expected volatility. Applying this situation to these three conditions, (1) On the one hand, the European stock market reached a historic high on May 15th, and the US stock market reached a new high on May 23rd. In addition, the initial value of the May Purchasing Managers Index released on May 24th showed an increased expectation of service-led economic recovery in the United States and the Eurozone. These factors indicate an increase in investor risk appetite. In addition, (2), on the one hand, the Bank of Japan is expected to maintain a low-interest rate policy. At the same time, the Bank of New Zealand, Australia, and the UK have delayed market expectations for the timing of their interest rate cuts. Considering the changes in (1) and (2), (3) has also been achieved, providing a favorable environment for yen financing currency trading.
In the short term, we need to closely monitor the following factors to determine the sustainability of yen financing currency trading: (4) the trend of European and American stock markets, and (5) the Bank of Japan's financial policy decision-making meeting (to be held from June 13th to 14th). In terms of (4), the upward momentum of European and American stock markets has weakened after reaching a historic high. The European stock market has eliminated the feeling of undervaluation, while the US stock market has been suppressed under the cautious performance outlook of companies. The central bank must demonstrate a positive attitude towards interest rate cuts to restart the stock market's rise. Regarding (5), we must consider whether the Bank of Japan will adopt an active interest rate hike policy. In other words, the central bank's policy stance will also affect the trend of yen-financed currency transactions. In early June, on the eve of the Japan-US Europe monetary policy meeting, there may be a slowdown in the selling pressure on the Japanese yen. After these events, we will reassess the trend of yen-financed currency trading.
We must pay attention to the accumulation of yen-selling positions in the future. According to data from the Commodity Futures Trading Commission (CFTC) in the United States, the net selling positions of some speculators in the non-commercial sector in the Japanese yen have been increasing recently (as of May 28), reaching approximately 156000 lots. Suppose the investment environment changes unfavorable for yen financing currency trading. In that case, there may be a sharp appreciation pressure on the yen, as the liquidation of positions may lead to this situation. Although the weak sentiment of the yen still exists, we must be aware that the environment surrounding the yen is still unstable.
■ In June, a financial policy conference will be held between Japan, the United States, and Europe, impacting the trend of yen financing currency trading.
Since mid-May, we have witnessed a notable surge in yen financing currency trading. A unique characteristic of this period is that the Japanese authorities maintained their vigilance regarding intervention, and the rise of other cross-yen exchange rates became a prominent feature. For instance, the euro/yen exchange rate is nearing its historical high of 171.42 yen on April 29, the pound/yen exchange rate is at its highest level since August 2008, and the New Zealand dollar/yen exchange rate remains at its peak since July 2007.
It is generally believed that yen financing currency transactions need to meet three conditions: (1) an increase in investor risk appetite, (2) a high level of interest rate spread, and (3) a decrease in expected volatility. Applying this situation to these three conditions, (1) On the one hand, the European stock market reached a historic high on May 15th, and the US stock market reached a new high on May 23rd. In addition, the initial value of the May Purchasing Managers Index released on May 24th showed an increased expectation of service-led economic recovery in the United States and the Eurozone. These factors indicate an increase in investor risk appetite. In addition, (2), on the one hand, the Bank of Japan is expected to maintain a low-interest rate policy. At the same time, the Bank of New Zealand, Australia, and the UK have delayed market expectations for the timing of their interest rate cuts. Considering the changes in (1) and (2), (3) has also been achieved, providing a favorable environment for yen financing currency trading.
In the short term, we need to closely monitor the following factors to determine the sustainability of yen financing currency trading: (4) the trend of European and American stock markets, and (5) the Bank of Japan's financial policy decision-making meeting (to be held from June 13th to 14th). In terms of (4), the upward momentum of European and American stock markets has weakened after reaching a historic high. The European stock market has eliminated the feeling of undervaluation, while the US stock market has been suppressed under the cautious performance outlook of companies. The central bank must demonstrate a positive attitude towards interest rate cuts to restart the stock market's rise. Regarding (5), we must consider whether the Bank of Japan will adopt an active interest rate hike policy. In other words, the central bank's policy stance will also affect the trend of yen-financed currency transactions. In early June, on the eve of the Japan-US Europe monetary policy meeting, there may be a slowdown in the selling pressure on the Japanese yen. After these events, we will reassess the trend of yen-financed currency trading.
We must pay attention to the accumulation of yen-selling positions in the future. According to data from the Commodity Futures Trading Commission (CFTC) in the United States, the net selling positions of some speculators in the non-commercial sector in the Japanese yen have been increasing recently (as of May 28), reaching approximately 156000 lots. Suppose the investment environment changes unfavorable for yen financing currency trading. In that case, there may be a sharp appreciation pressure on the yen, as the liquidation of positions may lead to this situation. Although the weak sentiment of the yen still exists, we must be aware that the environment surrounding the yen is still unstable.