Talking Points:
- Yen borrowing costs plunge as Japan’s fiscal year end approaches
- Annualized rate for overnight loans hits -2.5%, lowest since 1998
- Holding short-JPY exposure a painful proposition for FX traders
It is not unusual to see a strain on funding drive up borrowing costs at the end of the fiscal year. Banks and funds roll over positions and businesses close out or renew credit arrangements. This puts a strain on the stock of loan-able funds in a particular currency, pushing the cost of near-term financing upward.
This process is taking on unusual dimensions in Japan, where the new fiscal year begins on April 1. Rather than pushing borrowing costs higher, the proximity of rollover from the FY2014-15 period and into FY2015-16 has produced an extraordinary drop in the cost of Yen-denominated credit.
The cost of borrowing Yen overnight has plunged to an annualized rate of -2.45 percent, the lowest on record since at least mid-1998. This implies a market so saturated with JPY liquidity that banks are willing to pay borrowers nearly 2.5 percent just to take Yen off their books through the rollover period.
The implications for currency traders are no less dramatic than the underlying move in lending rates. While the over-the-counter (OTC) nature of the spot FX space means there is no central venue to aggregate exposure, looking at the DailyFX SSI positioning indicator as a proxy is rather telling.
FXCM traders are net-long USD/JPY by a margin of nearly two to one. That means there are about two bets short the Yen for every long. These positions are rolled over daily to prevent the requirement of physical delivery, meaning they incur daily borrowing costs.
In an environment so skewed that overnight rates jump from -0.1 to -2.45 percent in a single day, money-market spreads will widen and obtaining credit to roll over (i.e. refinance) a Yen position is going to prove costly. This means most JPY-exposed traders are in for some near-term pain.
--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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