- Ruffer Investing has big positions in the Japanese yen, the world's worst performing currency.
- Though the fund cited poor performance this year, it expects the yen to appreciate "violently."
Ruffer Investing, whose winning bets in the volatility market earned it the nickname "50 Cent," is betting big on the world's worst-performing currency: the Japanese yen.
The yen has fallen over 14% this year, representing a major driver behind the UK fund's poor performance. But Chairman Jonathan Ruffer said in a letter earlier this month that he expects a major reversal.
"With currencies, it is always dangerous to try to anticipate a change of direction, even when the fundamentals cry out for it, and our performance has suffered accordingly," he wrote. "We believe the yen is oversold for technical reasons and that, when these dissipate, it is likely to move sharply higher. Moreover, when it does, it is likely to be concertinaed into a brisk uncontrollable move upwards."
A major factor in the yen's weakness is Japan's unique yield curve controls, which have kept rates ultra-low and make them especially unattractive against the high-yielding Treasury market.
Steady slides in the yen have driven speculation that the Bank of Japan will eventually intervene. Over the summer, the central bank loosened Japan's yield policy, though this wasn't enough to compete with foreign rates.
But Ruffer is betting that buyers will surge back.
"Our confidence comes from the observation that there will be forced sellers of foreign currencies into the yen and, simultaneously, forced buyers of yen, which will combine as a catalyst in turning its direction," the letter said. "If these events occur in the course of a market dislocation, the exchange rate could move as violently as it did in 2008 (up by 50% against sterling in short order)."
Ruffer expects that local buyers will feed into demand as the central bank will have to completely rid itself of the yield controls. To do this, the country's lenders will have to take up bonds at their current high prices, and will finance the purchase by selling foreign holdings.
"Many of those holdings have already been hedged into yen, but much of it will still be held in local currencies, with the conversion into yen telescoped into a short time window," Ruffer wrote.
International investors, who have borrowed large sums of yen to take advantage of the low rates, will also help fuel the currency's rise when they sell their foreign government bonds too, he added.
The London-based fund, managing over $25 billion, previously made its name in the volatility market. It earned its "50 Cent" moniker by anonymously buying VIX options priced at $0.50 at a time when stocks were moving higher. Though Ruffer initially suffered millions in losses from the bet, the firm pulled in over $800 million when markets tumbled in 2020.