Newscasts - Market Insight: Recent short positioning of yen was 'extremely excessive'

Magnificent Hotel Investments

25/07/2024 14:34

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Source: 'Reuters - Business videos'

Description: CIBC's Jeremy Stretch explains why an unwind of risk appetite
driven by the retreat of the magnificent seven stocks in the US contributed to
a Yen rally this week, which was fueled further by a realisation that a short
positioning on the Yen was excessive.
Short Link: https://refini.tv/3LBSOXY

Video Transcript:

The yen continues its rally and reaches a six-week high against the Dollar.
Welcome to Market Insight. I'm Ludovica Brignola. The Yen has rallied for
fourth day on Thursday, reaching a six-week high. That's as traders ditched
their bets against for currency, but also has a plunge in global stocks that
drove investors towards traditionally safe assets. So, what's happening to the
Yen? Well, to help answer that and more, I'm joined by Jeremy Stretch, Chief
International strategist of CIBC. Thank you very much for being with us today.
So, right.

Pleasure.

The yen, what's happening? Why this sudden revaluation?

Well, there are obviously several factors in play. One, of course is the
generalized unwind of risk appetite in the course of the last few sessions are
really emphasized by the retreat some of those key Magnificent Seven stocks in
the US, so we've seen a degree of risk negativity. I think also we've seen a
recognition and a realization that Yen short positioning was extremely excess
and or excessive. So, we had a rapid build-up of in short positions but also
at the same time as we're considering the policy easing from most global
central banks markets have been starting to up expectations or reprice the
backdrop for next week's BOJ meeting. So, at one stage earlier in today's
session, we had almost nine basis points of tightening price for next week.
So, combination of those factors have really encouraged a significant risk
reversal and accordingly, those risk barometer trades, including the majority
of those which are short of Yen, have been unwound quite aggressively.

Interesting. Excessive positions on the Yen as you were saying. So, what does
this sharper evaluation of the mean for carry trade as you were saying? I
mean, and what currencies? Would be affected the most by these carry trades
unwinds.

Well, if you're looking at a wrist, barometer and or a carry trade, then
clearly across like Aussie yen is the one of the most influential in that
particular regard. So, when we look at what we've seen in terms of the
performance of the Australian Dollar against the Japanese Yen over the course
of the last two weeks. We've seen more than 9% a move in that particular
cross. So that's really reflecting that sort of risk barometer and or carry
trader, that's most visceral if you like. So, what we are seeing is that those
currencies which are very much driven by global growth or commodity dynamics
are certainly being pressured to an extent and particularly those that also
have elevated carry such as the Aussie at the expense of a return to those
safer haven markets? And that includes the Yen, that includes the Swiss franc
and also ironically somewhat to an extent also a little bit of Euro interest
coming back in that context as well.

Right. And let's move to the UK now in light of what we've seen in terms of
the new government policies, what effect do you think? All this will have on
sterling in the medium and long term.

Well, I think that's an important point. So, what really characterizes the
medium and long term, because we have seen a substantial rerating of sterling
valuations over the course of the last few weeks. And we've seen that
reflected in terms of a rapid buildup of speculative long position. So, in the
same way that we've seen massive build up again shorts, we've also seen a
concurrent build up in sterling long positions of investors have back the
presumption of return of stable government and a more proactive business
orientated backdrop. So, we are seeing I think the prospect of a stronger and
rerating of sterling's valuations over the course of the next two to three
years perhaps, but I think in the shorter term, it's still the case that I
think some of that positioning does look a little excessive. Particularly if
we're still very mindful that the Bank of England could well be in play in the
context of a rate cut as early as next week's meeting. Now we have been
anticipating a rate cut for some time. The market is just upping those
expectations just a little. And I think that will play into the narrative of
Sterling, cheapening up at least in the short term. So, I think we have to
differentiate between those short terms and those much longer-term dynamics
where I think FDI flows will be much more encouraging. But I think it's too
early to trade that just yet.

Right. Meanwhile, across the pond, the market is pricing in a Fed cutting
cycle starting in September. What does this mean for the Dollar? Also,
considering that other major central banks, except of course the BOJ are or
are about to be in cutting mode?

Well, I think what we're seeing is that the US economic exceptionalism that
really drove the dollar higher in the early part of the year is diminishing.
So, in a sense, if we are going to see slower growth and or Fed easing, that
should imply that there is a graduated cheapening up in the dollar,
particularly if investors start to become a little more mindful of those twin
track deficits that are still very large in the US, both in terms of the
current count and the fiscal shortfall. So that's the sort of the downside
risk of the Dollar. But of course, there is still that overarching issue of
political risk and uncertainty in that regard in the context that perhaps we
could well see a steeper US curve. So, there are sort of sort of two way pulls
in terms of the Dollar, but I think it may well be the case that unless we see
a significant uptick in terms of a political inspired negativity. It may be
the case that the Dollar just cheapens up slightly, and it may well be the
case that that economic exceptionalism, as I say, that has been Dollar
supportive will start to dissipate into next year.

Really, really interesting. And one last point on Europe. We've seen very
disappointing PMIs in Europe yesterday, today. A business survey showed that
essentially companies in the block's two largest economies, it's France and
Germany, are growing more pessimistic. What's happening in Europe, Jeremy?

Well, of course the Eurozone is very much driven by external demand and
particularly not on the manufacturing side when you're looking at the key
economy across the Eurozone in terms of Germany. So, if we are seeing further
question marks about the Chinese growth narrative now, we've seen of course
unexpected rate cuts through the course of this week. So, the Chinese are
doing their level best to maintain activity and maintain sentiment, but
question marks about global growth are and will prove to be problematic for
the Eurozone. So, we've seen those forward-looking survey indicators
retreating quite significantly. Expectations within the iPhone survey dip
below the current reading, and that's a rather negative backdrop. So, I think
that does suggest that the euro macro-economic projections are going to be
challenged. But I guess from a euro perspective, it's still the case that
obviously those cross currents and the Dollar are probably limiting euro
Dollar downside at least for now, but it does seem difficult to be really
finding solid and significant justification to buy you're at these levels.

Great analysis. Jeremy Stretch from CIBC, thank you very much for being with
us today. And perhaps your Market Insight