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Life insurers eye deluge of yen selling

The dollar broke new ground in its post-US election surge against the yen on Friday as the market eyed a potential ¥3.8tn ($34bn) deluge of yen selling by life insurers. 

Tokyo’s morning session saw speculators pushing the dollar into the high ¥113 zone — an eight-month peak and a move that is underpinned by more unwinding of long yen positions built ahead of what big Japanese investors had assumed would be a “status quo” US presidential election.

Traders said they now expect the ¥114 level to be breached either during the Japanese day or when London starts trading, continuing a pattern that has seen the greenback climb steadily by more than 10 per cent from the ¥101/$ where it stood on election night. 

Absent from that rally, however, have been Japan’s nine largest life insurers — a group that has, since April, increased its collective exposure to dollar denominated assets to 64.5 per cent of their combined $722bn foreign asset portfolio.

While building those positions, the Japanese life insurers saw a world fraught with political and currency risk: the June result of Britain’s EU referendum served to harden that stance.

The result, despite the rising cost of doing so, was that the lifers raised their currency hedging ratio for dollar assets to 60.1 per cent in the first half of the 2016 financial year. That marks the lifers’ highest hedge ratio since late 2012 and the start of the “Abenomics” era.

According to analysts at Nomura, the question that now looms over the yen as it closes-in on ¥114 per dollar is whether the direction of the yen and stability of the Japanese government bond (JGB) market are now firmly enough set to provide room to reduce hedging ratios.

It is quite likely, argues Nomura’s Yujiro Goto in a note released on Thursday, that the Japanese lifers had not built a Trump victory into their calculations and that, even now, their positions may not have turned positive on the dollar. 

“Political uncertainty in the US and Europe remains high, but we expect major lifers to be more positive on taking forex risks gradually as hedge costs for US dollar investment are expected to rise further and their stance so far in 2016 has been cautious,” said Mr Goto. If they lowered their hedge ratios 5 per cent, he added, that would imply ¥3.8tn of yen selling.

Not all believe, however, that the Japanese lifers are anywhere close to feeling comfortable with the situation. They were quick to cut their exposure to sterling-denominated assets in the wake of the Brexit vote, and are unlikely to make substantial changes to their positions until Mr Trump’s inauguration in late January. 

As some point out, even after its recent rally, the dollar-yen pair is close to the midpoint of the range it has traded in since the start of the year — a range that already forms the backbone of the lifers’ hedging strategy. 

Junya Tanase, an FX strategist at JPMorgan, said that the lifers still look at the US with a high level of uncertainty despite the recent moves by the dollar. He said: “I do not expect any significant reduction of FX hedging from the life insurers because according to their recent investment strategies, they are expecting a range of about between ¥95-¥115 on average. Unless they change their forecasts they will see the current level of USD/JPY as too rich, and they do not have a strong incentive to take new currency risk.”

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