Yen rallies; is this the great carry unwind?

The yen advanced the most in more than three weeks against the dollar as a slump in China’s currency and its stock market stoked concern growth in the world’s second-biggest economy is slowing.

Japan’s currency gained versus most of its 16 major peers on demand to unwind carry trades while the yuan tumbled the most in more than five years on bets the central bank wants an end to the currency’s gains. Demand for the less-risky currencies rose after a Russian official said Ukraine faces a “high” chance of defaulting on its sovereign debt. South Africa’s rand reached a six-week high as a report showed the economy grew more than forecast in the fourth quarter.

“Risk aversion continues to play a role in dollar-yen,” Robert Sinche, a global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said in a phone interview. “It’s a bit surprising, given there’s been some big moves happening in China and other markets,” that moves in the currencies market are limited, Sinche said.

The yen strengthened 0.3 percent to 102.16 per dollar as of 2:59 p.m. New York time, reaching the biggest advance on a closing basis since Feb. 3. The euro rose 0.1 percent to $1.3743. Japan’s currency climbed 0.3 percent to 140.40 per euro.

Carry Trade

Carry-trade investors, who borrowed the Japanese currency at the end of 2013 to fund against all 16 major currencies, have incurred losses this year, according to data compiled by Bloomberg.

“Coming into the year, there was a pretty strong consensus this is going to be a better year for the dollar, and there were some pretty sizable longs being put against the yen and those haven’t worked out,” Pierpont’s Sinche said. “Foreign-exchange investors’ willingness and ability to put on big positions really get squeezed out now.” A long position is a bet that an asset will increase in value.

JPMorgan Chase & Co.’s volatility index for the currencies of the Group of Seven nations fell to 7.50 percentage points, touching the lowest since Oct. 28.

The yuan dropped for a sixth day on speculation the People’s Bank of China is attempting to ward off speculators before a possible widening of the trading band. The Shanghai Composite Index slumped 5.1 percent in the past four days on speculation that a weaker housing market will erode demand for everything from electric appliances to cars.

Yuan Outlook

“Some investors may link the weakening of the yuan to a less optimistic outlook,” said Zeng Xianzhao, an analyst at Everbright Securities Co. in Chongqing. “Property financing curbs will probably be prolonged and other banks will follow suit. The slowdown in the property sector will spill over to other industries.”

The currency fell 0.5 percent to 6.2310 per dollar, according to China Foreign Exchange Trade System prices. That’s the biggest drop since December 2008.

The spot rate ended the day weaker than the central bank’s reference rate for the first time since September 2012. It can diverge by a maximum 1 percent from the fixing, which was set at 6.1184 today.

Volume in over-the-counter options on the dollar-yuan exchange rate amounted to $22 billion, the largest share of trades at 38 percent, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Dollar-yuan options trading was 216 percent more than the average for the past five Tuesdays at a similar time in the day, according to Bloomberg analysis.

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