RBC BlueBay goes long on the Japanese yen against the US dollar, supported by political transition and Bank of Japan interest rate hikes

According to the Zhitong Finance APP, BlueBay Asset Management, a subsidiary of the Royal Bank of Canada (RBC), has established a long position in yen, betting that Japan's political transition and the potential interest rate hike by the Bank of Japan in October will further strengthen the yen.

Mark Dowding, Chief Investment Officer of BlueBay, stated: "We have established a position in USD/JPY using short positions in the dollar, at a level slightly below 150. We do believe that there is a high likelihood of action in October. Therefore, as long as Koizumi wins the Liberal Democratic Party (LDP) leadership election, now is a more favorable time to go long on the yen."

Japan's Agriculture Minister and reformist figure Shinjiro Koizumi announced on Tuesday that he would join the LDP leadership race, with investors believing that Koizumi is more supportive of interest rate hikes than his competitor, Sanae Takaichi. Takaichi is seen as more inclined towards loose monetary and fiscal policies. The LDP, the largest party in Japan's ruling coalition, will hold its leadership election on October 4. Previously, Prime Minister Shigeru Ishiba decided to resign after a crushing defeat in the July elections.

The USD/JPY exchange rate has fallen below a key technical support level.

BlueBay expects the USD/JPY exchange rate to drop to around 140 in the short term, while the medium-term fair value is close to 135. Over the past three months, the yen has been the worst-performing G10 currency against the dollar, depreciating by 0.8%.

BlueBay's view sharply contrasts with that of hedge funds. As of September 2, hedge funds have increased their short positions in yen for four consecutive weeks. Strategists at Bank of America and HSBC also believe that the yen will weaken further against the dollar.

Earlier reports indicated that despite political turmoil, the Bank of Japan may still raise interest rates again this year, prompting traders to increase their bets on further tightening of policy by the Bank of Japan. Overnight index swap trading currently shows that the likelihood of a rate hike by the Bank of Japan before the end of the year is about 60%. It is expected that Bank of Japan policymakers will keep the benchmark interest rate unchanged at 0.5% in this week's policy meeting.

Japan's political and fiscal uncertainties have pushed up ultra-long bond yields, with the yield on Japan's 30-year bonds reaching a historic high of 3.285% earlier this month. Dowding believes this level is "fundamentally" attractive.

BlueBay currently holds a long position in 30-year Japanese government bonds. Dowding stated that if Koizumi wins the LDP leadership election and the Bank of Japan subsequently raises interest rates, he would consider shifting to "longing long-term bonds," which would make him "believe that policymakers are taking the right actions" to control inflation.

The Bank of Japan will announce its interest rate decision on Friday, and prior to that, the Federal Reserve will hold a policy meeting, with the market widely expecting a 25 basis point rate cut by the Fed.

As of the time of writing, the USD/JPY exchange rate remains around 146.49