Yen gains on reports of currency hedging by Japan’s mega pension fund

The yen strengthened against the dollar and the euro in Asia trade Tuesday, on news that Japan’s ¥135 trillion ($1.1 trillion) Government Pension Investment Fund has started currency hedging.

The greenback USDJPY, -0.16% hit as low as ¥122.98 before bouncing back to ¥122.92, compared with ¥123.10 late Monday in New York.

Earlier in the session, many investors were sidelined ahead of a European Central Bank policy meeting scheduled for Thursday and U.S. jobs data Friday. But the greenback firmed above the ¥123-mark on expectations that the Federal Reserve will start raising short-term rates later this month.
Later in the session, however, the dollar quickly weakened against the yen due to buying of the Japanese currency on news that Japan’s public pension fund, known as the GPIF, has started to hedge a small amount of its investments against currency fluctuations.

The Wall Street Journal reported the GPIF has started to hedge against fluctuations in the euro in the “short term” due to a negative outlook for the currency amid expectations for further easing by the ECB, quoting people familiar with the matter. The fund previously didn’t hedge any of its roughly ¥50 trillion in assets denominated in foreign currencies.

The news was a surprise to some investors who believed the GPIF’s unhedged currency investment to buy foreign bonds and stocks leads to a weaker yen.

“Among non-Japanese investors, the GPIF is pretty much well known as the world’s biggest pension fund,” said a senior Japanese bank dealer. “Given the (GPIF’s) big exposure to the currency market, the story implies that a further weakness of the yen is hard to expect,” though it’s still unclear about how big the currency hedging would be, said the dealer.

The yen strengthened against the euro EURJPY, +0.08% which briefly dropped to as low as ¥129.77 around the lunch break in Tokyo. The common currency was at ¥130.15 midday, compared with ¥130.06 late Monday.

Against the dollar, the euro EURUSD, +0.2650% rose to $1.0585 from $1.0566 late Monday. Overnight, the currency dropped to $1.0557, its lowest since April 14.

The WSJ Dollar Index BUXX, -0.24% a measure of the dollar against a basket of major currencies, was down 0.16% at 90.69.

http://www.marketwatch.com/

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