RBC BlueBay Goes Long Yen, Eyeing BOJ Rate Hike, Leadership Vote

RBC BlueBay Asset Management has taken a long yen position, betting that Japan’s political transition and a possible Bank of Japan rate hike in October could drive further strength in the currency.

“We initiated the position just below 150 on dollar-yen” using dollar shorts, chief investment officer Mark Dowding said in an interview. “We do think an October move is possible or likely. And so we think this is a more attractive moment to be long the yen, as long as Koizumi is the victor in the Liberal Democratic Party’s leadership contest.”

Investors view Agriculture Minister Shinjiro Koizumi , who on Tuesday officially the race for LDP leader, as more supportive of rate hikes than likely rival Sanae Takaichi , who is seen as favoring monetary easing and looser fiscal policy. The LDP, the largest party in the ruling coalition, will hold its leadership vote on Oct. 4, following Prime Minister Shigeru Ishiba ’s decision to step down following a July election .

BlueBay sees dollar-yen trading toward 140 in the near term, with a medium-term fair value closer to 135. Over the past three months, the yen was the worst performing G10 currency against the dollar, weakening 0.8%. The currency was up slightly to 146.51 as of 10:19 a.m. Tokyo time.

BlueBay’s view contrasts with hedge funds that increased their short positions against the yen for a fourth consecutive week through Sept. 2. Strategists at Bank of America Corp. and HSBC Holdings Plc also see the yen further weakening against the dollar.

The London-based firm has added to its position over the past month as comments from BOJ Governor Kazuo Ueda and other board members suggested policy normalization remains on track, assuming political risks don’t derail it.

Traders have raised bets on new BOJ tightening after Bloomberg News the central bank could hike again this year regardless of political volatility. Overnight index swaps are now pricing in an about 60% chance of a move by year-end. BOJ policymakers are expected to keep the benchmark rate unchanged at 0.5% at its policy meeting this week.

Political and fiscal uncertainty in Japan has pushed up super-long bond yields, with the 30-year reaching a record high of 3.285% earlier this month, levels which Dowding sees as attractive “on an outright basis.”

The firm is currently long 30-year Japanese government bonds against 10-year securities, after its long-standing short position earlier this year. Dowding said he would consider shifting to “go long duration” if Koizumi wins the LDP leadership race, and the BOJ follows through with a rate hike which would give him “confidence that policymakers are doing the right thing” to keep inflation under control.

The BOJ rate decision expected Friday will follow a of the US Federal Reserve’s policy committee, which is widely predicted to cut interest rates by 25 basis points.