Japan’s small investors turn cautious on the rand

Tokyo — Japan’s contrarian retail investors have cut long positions in emerging-market currencies — right at the time monetary easing in developed economies suggests they do the opposite.

In a move that is at odds with their tendency to chase high yields, these investors are turning cautious on the currencies like the rand and the Turkish lira. This is even as many of the signs emanating from the Federal Reserve and European Central Bank (ECB) point to a widening spread in yields with developed markets.

Last week the ratio of long positions to shorts in the rand, lira, Mexican peso and the Polish zloty contracted to the lowest level since September, based on data compiled by Bloomberg from Tokyo Financial Exchange. The ratio has ticked up slightly since then, but it is still far below levels seen in June.

Normally, the time would be ripe for Japanese retail investors to buy high-yielding currencies on dips and to focus on swap points, or carry.

But the recent strength in the dollar has given people reason for caution, according to Takuya Kanda, GM at Gaitame.com Research Institute in Tokyo, which caters to retail investors. There is a view that the likely rate cut by the Fed this week will bolster the US economy, helping the greenback retain its advantage as a high-yielding developed-nation currency, said Kanda.

The Bloomberg dollar spot index has rallied 1.4% in July, the biggest monthly gain since October, after bets of a 50-basis-point move by the Fed faded in favour of a quarter-point reduction.

Societe Generale also disagreed with the “consensus” belief that a Fed easing cycle will be bullish for emerging-market currencies. The market has already priced in around four rate cuts to mid-2020, which has helped these currencies stabilise, Jason Daw, head of emerging-markets strategy at Societe Generale, wrote in a note on Tuesday. Many central banks in developing economies are showing a willingness to ease policy, with the spread between emerging-market yields and US treasuries at a decade low, he said.

The rand has seen the steepest reduction in bullish wagers among the four emerging-market currencies amid deep problems at state power firm Eskom and concern about the nation’s fiscal outlook. The long/short ratio on the rand dropped to 8.80 as of July 30, from a high of 18.84 in mid-June, the exchange data showed.

The ratio for the lira has been trending lower since March, declining from 9.52 to 4.38. Rates intrigue has been at the fore in Turkey, with President Recep Tayyip Erdogan replacing the central bank chief as part of a push to lower borrowing costs.

While dollar interest rates over 2% are appealing given uncertainty in many countries, emerging-market currencies still offer more and may lure back Japanese retail investors.

The Bank of Japan also gave them a reminder on Tuesday that the dire state of yields at home would not be changing until at least around spring of next year, which will undoubtedly add to the swelling pile of negative-yielding debt around the world.

“I expect carry demand to pick up,” said Hosui Orihara, a senior economist at Mizuho Securities in Tokyo. “With the Fed set to cut rates and ECB turning dovish, emerging-market currencies are likely to be a preferred choice.”

Bloomberg