The yen’s surge should force a portfolio review for all investors
The yen is closing in on its strongest level this year, a move that demands every global investor revisit their portfolio given how far-reaching the impact of this currency swing could be, warns the CEO of financial advisory giant deVere Group.
The comments from Nigel Green come as the yen surged to 152.89 per dollar, its strongest level since February, having traded near 160 barely a week earlier.
Behind that jump is one of the biggest unwindings of borrowed money the currency markets have seen in decades, with a Bank of Japan meeting on 18 September adding fresh urgency to the swing.
He says: “Put simply, an enormous amount of money around the world has been borrowed cheaply in yen and pumped into other investments.
“Right now, that trade is unravelling fast, and when a trade this size unwinds, it shows up in ordinary portfolios around the world.”
For years, big investors have borrowed yen at rock-bottom cost and used the cash to buy higher-returning assets elsewhere, everything from US tech stocks to bonds in developing economies.
It has been one of the most popular trades in the world, worth an estimated 360tn yen, or around $2.35tn.
“The trouble starts when the yen itself rises. Those borrowed positions suddenly cost more to hold, and the investors behind them are forced to sell what they bought in order to pay the loan back,” explains the deVere CEO.
“This is not some abstract trading-desk story,” says Nigel Green.
“When investors have to sell in a hurry to cover a currency bet gone wrong, they sell whatever they hold, and that can mean stocks, bonds and funds that ordinary savers are invested in too, often through their pension or their workplace retirement plan.”
What makes this particular move unusual is that it was not triggered by a piece of economic news or a surprise decision from a central bank.
“It was set off by automatic sell orders built into trading systems, designed to fire once the currency hit certain levels.
“Moves like this tend to overshoot before they calm down, and this overshoot is where the real damage to portfolios often happens.”
The yen has also jumped nearly 5% this month against currencies popular with the same kind of borrowed-money trade, including the Mexican peso and the Turkish lira, showing how far the ripple effects reach beyond Japan.
“Anyone holding Japanese shares is looking at a mixed picture,” he notes
“Companies that sell heavily overseas, carmakers and electronics manufacturers among them, take a real hit because the money they earn abroad is worth less once it comes home, while businesses that sell mainly inside Japan or rely on imports can actually come out ahead.
“If you hold US shares or other investments that were quietly propped up by cheap yen borrowing, you can see sudden swings in value even though nothing about the company itself has changed,” says Nigel Green.
“And if your pension or investment portfolio is simply spread across different countries and currencies, this is a reminder that currency moves alone can add to or take away from your returns, regardless of how well the underlying investments are actually doing.”
Traders are now watching whether the yen breaks through 152 as the next marker in this unwinding, with markets pricing a 97% probability that Japan’s central bank raises interest rates by a quarter point, to 1.25%, at this month’s meeting.
“A break below 152 would likely push the yen even stronger and could deepen what is already one of the biggest currency stories of the year.
“Some analysts are already talking about the yen pushing into the mid-140s if this keeps accelerating.
“Investors have spent the summer focused on inflation and interest rates,” says Nigel Green.
“Right now, the currency market deserves just as much attention, and anyone who has not checked how exposed their portfolio is to the yen could be more at risk than they think.”