TOKYO – Hedge funds turned bearish on the yen in the week before Japan’s ruling Liberal Democratic Party failed to gain majority at a general election, threatening to amplify losses in the currency.
Speculative investors switched to a net short position on the yen for the first time in October, Commodity Futures Trading Commission data for the week to Oct 22 showed.
The data came before the Oct 27 election results, which will now require Prime Minister Shigeru Ishiba to find a route to a stable government – even as the outcome raises questions about his own future.
The yen hit a three-month low after markets opened on Oct 28, sliding more than 1 per cent against the dollar.
One dollar bought 153.88 yen, the Japanese currency’s lowest value since late July. Exit-poll projections by public broadcaster NHK and other media outlets after the Oct 27 vote showed the Liberal Democratic Party and its junior coalition partner falling short of a majority.
Rarely has the yen been so much at the mercy of political uncertainty.
Mr Ishiba was initially seen as a supporter of policy tightening in Japan before he blindsided markets earlier in October by saying the economy was not ready for further hikes.
The developments over the weekend may render the yen, already wallowing near the weakest level since late July, even more vulnerable as traders latch on to local politics and the upcoming US election for new reasons to sell.
“It’ll be very easy for carry traders, including hedge funds, to sell the yen if the government does not stabilise,” said Mr Shoki Omori, chief desk strategist at Mizuho Securities, referring to a strategy that involves borrowing yen funds to invest in higher-yielding assets.
The yen’s slide may prompt the authorities to intervene to bolster the yen even as investors fret about how the outcome fuels uncertainty in the nation’s legislative process, further denting the currency’s appeal.
Asset managers were similarly bearish on Japan’s currency, having flipped to a net short of 17,226 contracts during the week to Oct 22, the first time since mid-August, data showed. BLOOMBERG