(Bloomberg) -- The yen looks set to end September as the worst-performing Group-of-10 currency. And those betting on a turnaround by the end of the year have the weight of history against them.
The fourth quarter has proved a bane for yen bulls over the last decade, with the currency weakening an average 3.6%, and falling in seven out of 10 years. JPMorgan Chase & Co. sees it slipping to as low as 110 per dollar by the year-end, which is a 2.1% drop from current levels.
Strategists are bearish also because the yen’s seasonal weakness this year is coinciding with large redemptions of Japanese government bonds. With local yields near record lows, a bulk of this money is seen being reinvested in assets overseas.
“Japanese investors are expected to sell the yen as they need to allocate their funds abroad to seek returns,” said Tohru Sasaki, head of Japan markets research at JPMorgan in Tokyo. “The dollar should test around 109-110 yen in the near term.”
The yen has lost 1.3% versus the dollar so far in September as signs of progress in U.S.-China trade relations talks emboldened investors to shift into risk assets, damping demand for havens. The pessimism hasn’t swayed hedge funds, who remain bullish on the currency.
While the funds trimmed their net yen long positions slightly in the week ended Sept. 17 to 34,735 contracts, the tally remains near an almost three-year high of 36,450 seen mid-August, according to data from the Commodity Futures Trading Commission.
JGBs worth about 24.3 trillion yen ($226 billion) are due to mature during the rest of 2019, with 18.9 trillion yen of that in December alone, according to data compiled by Bloomberg.
“Investors are expected to have plenty of cash coming from maturing JGBs,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Yields on Treasuries will still be attractive for Japanese investors even if the Fed cuts rates one or two more times.”
Treasury 10-year yields are set for their biggest monthly gain in a year as the Federal Reserve signaled policy makers did not expect to need deep interest-rate cuts going forward. Their premium over similar-maturity Japanese government bonds has climbed 23 basis points from an almost three-year low of 174 in late August.
READ: Japan Widens Lead Over China as Top Foreign Holder of Treasuries
To be sure, there are still a number of factors -- local and global -- that could swing the yen’s fortunes during the fourth quarter.
The currency remains particularly sensitive to news on trade and geopolitics. In addition, Japan’s planned sales-tax hike comes into effect from Oct. 1 and the month will also see a potentially pivotal Bank of Japan policy meeting. Traders will also be taking cues from Brexit developments ahead of the U.K.’s Oct. 31 deadline for leaving the European Union.
Yet State Street Global Advisors expects the yen to be weighed down by large Japanese purchases of U.S. bonds as the second half of the fiscal year begins.
“Many investors seem to have missed the entry point to allocate money to foreign bonds this fiscal year as global yields came down tumbling,” said Hiroshi Yokotani, managing director and portfolio strategist for fixed income and currencies at in Tokyo. Funds will need to be “proactive,” he said, adding that he expects strong flows, mainly into U.S. credit.
(Updates prices throughout.)
--With assistance from Masaki Kondo.
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