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Last updated: February 26, 2013 7:40 pm
Hedge fund investors who made billions selling Japan’s currency this year have been caught short after uncertainty over the outcome of elections in Italy caused sharp falls in stock markets and triggered strong gains in the yen.
The euro suffered its largest daily move against the Japanese currency on Monday since the start of the eurozone crisis in 2010, as the unexpected stalemate in Italy unnerved global financial markets.
Shorting the Japanese yen has been one of the most popular trades for investors this year amid expectations that the Japanese government and a new guard at the Bank of Japan will take firm action to combat deflation, leading to a weakening in Japan’s currency. Buying peripheral eurozone bonds and the euro formed the other side of what has been a profitable strategy for large macro hedge funds this year.
Investors and traders said hedge funds that had been shorting the yen to buy peripheral bonds and equities this year reversed those trades late on Monday, causing the euro to drop more than 4 per cent from its peak against the yen, an unusually large move for the currency pair.
“The yen trade has become a popular macro-driven view, given the clear direction of policy in Japan, and those who have positioned to reflect it were very badly stung on Monday night,” said one investor who was among those to lose money in the sharp euro-yen moves.
One top investment bank said they had seen their second busiest day ever in foreign exchange trading on Monday, with yesterday shaping up to be even busier, as the unexpected stalemate in Italy roiled financial markets.
“The Italian election result provided a timely reminder that the euro remains a political project that is capable of sending the global economy into a tailspin,” said Paul Lambert, head of currency at Insight Investment.
The news that no clear winner was emerging from Italy’s elections at the weekend, with Silvio Berlusconi’s anti-austerity campaign winning more votes than expected, caused sharp falls in the euro on Monday. Those falls were exacerbated by heavy buying of the single currency only a few hours earlier after investors snapped up the euro on reports pro-austerity politician Pier Luigi Bersani was ahead in the polls.
Investors also said that the tendency among hedge funds to leap into the same trades had contributed to the sharp moves across the currencies market on Monday night. “We’ve been left with an awful lot of people short yen, short sterling, long equities and short volatility,” said one hedge fund investor. “The result is that when we hit a risk speed bump, everyone tries to reduce risk by doing the same things across their books.”
The euro resumed its slide against the yen yesterday but at a more muted pace, losing 0.5 per cent to touch Y118.96.
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