Industry Updates

Hedge funds betting on long positions in yen hit by Tokyo’s intervention to stop its rise

Thursday, September 16, 2010

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Opalesque Industry Update – A group of hedge funds betting “long” on the Japanese currency, took a hit Wednesday after Tokyo intervened to stop the surge of the yen, the Wall Street Journal reported.

The yen dropped 3% late Wednesday in New York, trading to 85.59 yen from Tuesday’s closing of 83.10 after the Japanese government intervened to keep the yen lower against the U.S. dollar. The decision spooked investors, who dumped their yen holdings.

John Taylor of FX Concepts one of the world’s largest currency-focused hedge funds based in New York with $7.8bn in AuM, told Bloomberg the firm “lost a whole bunch of money.” FX Concepts was estimated to have lost 2% on Wednesday but remains up 12% this year from gains made in previous surges of the yen.

Other funds which lost money betting on the yen were London firms Aspect Capital Ltd. and Winton Capital Management. However, Winton's $5bn Winton Futures Fund is still up 8% this year, the Journal said.

Kathy Lien, director of currency research at Global Forex Trading, cited data from the Commodity Futures Trading Commission which showed that hedge funds held a near-record level of 52,000 contracts of “long” positions on the yen as of Sept. 7, 2010.

A report by FTAlphaville showed that the Bank of Japan (BoJ) sold between $11bn and $12bn worth of yen into the market on Wednesday to buy dollars and arrest the rise of the Japanese currency.

It added that the BoJ has another $117bn in its war chest as back up in case the amount it dumped into the market was not sufficient. Figures from Japan’s Ministry of Finance revealed that it dumped at least $171bn in over 47 days in 2004 in its last major intervention into the currency.

A different report from Reuters indicated that the BoJ may have spent more than $20bn in Wednesday’s intervention to weaken yen against the U.S. greenbuck.

Despite efforts of the BoJ, many financial analysts believe Japan will not be able to stop the rise of the yen. Dan Cook, a senior market analyst at Chicago-based IG Markets said, "It probably takes a lot more money than any central bank is willing to print to defy the larger economic forces at work.”

Adding pressure to the yen is the anticipated decision the U.S. Federal Reserve to pump more money into the local economy to sustain the economic recovery.

However, Reuters added that there were also winners in Wednesday’s intervention, including Japanese exporters and some hedge funds. David Kupersmith, head trader at global macro hedge fund based in Greenwich, Connecticut Third Wave Global disclosed that their company recently positioned the fund's discretionary portfolio “short” for the yen on the belief an intervention by Japan’s central bank is forthcoming.

"We had no opinion on timing but the election made it more likely with the resolution of the political situation in the short term," he said.

Since Tuesday, the BoJ has been intervening to curb the rise of the currency. Most Asian stocks rallied on Tuesday as the Nikkei 225 jumped to a one-month high after Tokyo intervened to weaken the yen.

On Monday, Prime Minister Naoto Kan beat Ichiro Ozawa for control of the ruling party which sent the yet to rise to a 15-year high.
- Komfie Manalo

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