Yen’s stunning revival sparks ‘widespread liquidation’ across markets

Singapore – The yen’s stunning revival is upending global markets, dragging the yuan higher and hammering assets from Japanese stocks to gold and Bitcoin as investors reassess their leveraged bets.

The yen rose to its strongest mark in more than two months on July 25, reflecting burgeoning wagers that the interest rate gap between Japan and the United States will likely narrow, before easing gains and ending the session little changed at around 153.94 per US dollar.

Since reaching 30-year lows earlier this month, it has gained nearly 5 per cent against the greenback.

The stronger currency, which hurts Japanese exporters, helped send the Nikkei 225 index into a technical correction. It lifted the yuan to the highest in over a month, while battering the likes of the Australian dollar as carry trades fall out of favour.

Gold and Bitcoin also fell amid signs that traders were unwinding previously popular wagers to embrace the yen.

“It’s effectively a big deleveraging event caused by the short squeeze in the yen,” said Mr Kyle Rodda, a senior market analyst at Capital.Com. “It’s forcing widespread liquidation across markets.”

The yen’s new-found strength has come as an added source of volatility for global assets already rocked by fading enthusiasm about the artificial-intelligence frenzy that had powered Wall Street this year. But momentum will be tested in the coming week as fresh US data come due and both the Bank of Japan (BOJ) and Federal Reserve meet.

Behind the yen’s comeback was a massive retreat in the global carry trade that used low-yielding currencies like Japan’s to fund investments in higher yielders such as Mexico’s peso or the Australian and New Zealand dollars.

Growing expectations for the US Federal Reserve to cut interest rates as early as September were another key driver.

The yen’s earlier gains softened throughout the New York session after the release of second-quarter US data, which showed the economy accelerating faster than anticipated. The data “could burnish the appeal of the high-yielding, safe-haven King USD and help it outperform across the board,” said  Credit Agricole head of G-10 FX strategy Valentin Marinov.

Traders are also focused on the BOJ’s meeting on July 31. Swaps markets are now pricing in a roughly 70 per cent chance of a BOJ rate hike at the meeting, up from 44 per cent earlier this week.

Rising volatility

“The unwinding of yen shorts is undoubtedly contributing to the global risk-off environment,” wrote ING strategists including Mr Chris Turner in a note on July 25. “There is certainly more unwinding to be done here and data/events over the next few days present further downside risk to USD/JPY.”

Reflecting the growing caution against riskier assets, Bitcoin fell nearly 4 per cent on July 25 before paring losses. Gold, both a safe-haven asset and a target of leveraged bets, shed more than 1 per cent.

In the currency market, China’s offshore yuan closed 0.4 per cent higher against the dollar, benefiting from the yen’s strength even as the country’s central bank stepped up monetary easing earlier on July 25. In contrast, the once popular Australian dollar and Mexican peso sold off.

“While the summer mercury is high, liquidity is low and if the yen doesn’t stop, unwinds lead to cross-asset liquidations,” said Mr Calvin Yeoh, who helps manage the Merlion Fund at Blue Edge Advisers. This would “lead to rising volatility and forced selling by bloated exposures in volatility-control funds”. BLOOMBERG