It seems all hell is breaking loose as all crowded trades get punished. Mixed employment, manufacturing and export data from US, Shinzo Abe’s unexciting structural reforms and Draghi’s cagey comments about fiscal stimulus did not help matters. The current showcase example of dizzy market behavior is the appreciation in Japanese yen, a currency that everybody had buried in their trades. Today’s fall of USD by over -2 percent against JPY marks the largest single day crash in three years. The dollar plunged to as low as 96.08, roughly a 3 percent drop, before moving back to 97.03.
It seems the avalanche of selling has kickstarted with full force now. While there is virtually no one who has been bullish on yen, all short yen traders are likely suffering today. Other than the famous hedgies, there is a never-ending list of hedge funds who have short yen positions including John Burbank’s Passport Capital, Woodbine Capital, Pharo Macro, Hugh Hendry’s Eclectica Fund and Argonaut Capital, to name a few. This would be a good time to take a look at the big hedge funds which entered the short yen trade with a lot of pomp and show.
George Soros, the currency mogul, has made a whopping $1 billion from his bearish bet on yen. The Soros Fund, with $24 billion under management has raked up profits on this trade since November of last year. Soros is also known to be long on Japanese equities. However he is not a fan of Japan’s style of monetary easing, and Soros has said that Abe’s ways are dangerous for an economy the size of Japan. Soros expressed his fears a couple of months ago on CNBC, ” If the yen starts to fall, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then the fall may become like an avalanche.”
Dan Loeb initiated a massive short yen position, possibly towards the start of this year. In his Q1 shareholder letter he said that as Abe took office he decided to take long position in Japanese equities and short the currency. The short in JPY became Third Point’s best performer in April when yen weakened to ¥97 against the USD from ¥93. As for equities, Loeb has been active at Sony Corporation (NYSE:SNE) (TYO:6758) where he wants to shake up the board and restructure the company. After touching this year’s highest closing price of $22.9 on May 21, Sony is down 18 percent to date, but still up 70 percent YTD.
David Einhorn’s Greenlight Capital, up 8.8 percent YTD, has puts on yen and wrote in its Q1 shareholder letter that yen short was a big winner as currency weakened from ¥86.74 to ¥94.19 against USD. If Einhorn entered the trade towards the end of last year, then he is at a safe distance from losing on this bet. Additionally Einhorn has been betting against yen for quite a while, although he lost on this stance in 2010 and 2011.
John Burbank’s Passport Global, up 6 percent in Q1, added a short in yen in the first quarter as well. In a recent investor letter Burbank said that the next phase of yen weakening will trigger when domestic investors start investing in foreign assets and move away for traditional fixed income like JGB’s. This shift of focus from domestic institutions will pressure yen into another slide. We are waiting for the “shift of focus” to incite the yen slide as opposed to the current upswing that it is riding on.
Bass has been shorting yen since last year—since he opened the position quite a while ago and hasn’t pared it back significantly in the middle, his losses could be minimal. JPY was a lot stronger last year than the monthly lows it is touching now. Bass has also been a advocate of shorting JGBs, and is reported to have bought CDS in Japan’s sovereign bonds. As sell off has worsened in Nikkei, 10 year JGB yields have increased from 0.56 percent to 0.82 percent in a month’s time.
Goldman Sachs has been reiterating that the sell off in Japan is merely profit-taking by foreign investors. GS thinks that as foreign investors exit, corporates will ensue share buybacks and domestic investors will step up investments, leading to inflows of 3.5 trillion yen in equities/investment trusts. CLSA analyst Christopher Wood and Laurence Balanco also think that the same—that Nikkei is experiencing a cyclical correction which is nothing to worry about. Wood wrote, “It is also encouraging from a bullish perspective that the yen has only just broken the Y100/US$ level.” We are confused, bullish from whose perspective? Nobody wants yen to appreciate, Japan’s life apparently depends on it. And if Wood was thinking it won’t go lower than Y100 than apparently it is happily doing so now.