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BlueBay Bets on Yen Bounce in Wager FX Intervention Is Near

·2 min read

(Bloomberg) -- BlueBay Asset Management LLP has taken a long yen position, betting the currency will hit levels that force Tokyo into curbing further weakness.

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The European fund has wagered in recent months that the Bank of Japan will be forced to change its cap on bond yields, a key part of its monetary easing policy that’s helped drive the yen to a 24-year low versus the dollar.

BlueBay’s decision to enter a “tactical” yen position came as selling picked up after the dollar pushed above 140 yen earlier this week, according to CIO Mark Dowding. The money manager is keeping its short JGB position unchanged.

“After crossing 140, the move in the yen appeared to accelerate and we projected that authorities in Japan would want to stem this,” he said, adding that he believed a move above 145 yen could lead to intervention. The currency traded at around 142 per dollar Friday.

If authorities intervene to support the yen, that could drive the currency higher -- at least in the short term. BOJ officials this week ratcheted up language trying to arrest the the currency’s decline, hinting at direct market intervention.

The size of the new BlueBay position is “moderate” at the moment, said Dowding, who added that a further fall in the yen to 147.50 would be a signal to “double our position.”

A widening yield gap between the US and Japan has driven up the dollar and pushed the yen lower. Months of aggressive selling has left the yen undervalued, said Dowding, adding that he would like to adopt a “more structural long position” in the currency.

“However, for this to occur we need to see the BOJ adjust, or end, yield curve control,” he said. “Until this occurs, divergent trends in US and Japanese monetary policy will continue to pressure the yen weaker.”

In June, Dowding said the BOJ’s accommodative yield curve control policy was “untenable.”

For years the Bank of Japan has kept rates at rock-bottom levels to guide the economy out of decades of deflation. It employs a “yield curve control” policy, under which it caps the 10-year JGB yield at 0.25%. Altering or abandoning this control could trigger heavy selling in JGBs.

(Updates with comment, adds detail throughout)

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