16 Jul 2010, Kathy Wang, Asia Risk
The introduction of leverage caps on foreign exchange margin trading in Japan in the coming month is likely to place pressure on the Australian dollar/yen cross rate, according to research by the Royal Bank of Canada.
The Australian dollar has rallied during the past 10 days, rising 8.5% against the yen from its July 6 low. However, this trend could reverse as new Japanese Financial Services Agency (FSA) rules on leverage limits affecting Japanese retail investors become effective next month.
The Japanese regulator will impose a cap of 50 times leverage on collateral for margin trading at the start of August to curb currency speculation by retail investors. The cap will be further lowered to 25 times from August 2011.
"Limits on leverage could therefore see significantly reduced demand for AUD/JPY from August, as AUD/JPY has historically been the most favoured cross-yen play by leveraged Japanese investors," said Hong Kong-based senior currency strategist at RBC Sue Trinh in a report released today. "AUD/JPY typically accounts for around 50% of total yen shorts."
The leverage limit could result in a loss of business for some Japanese FX brokers, which can offer leverage of 400 times or more. Individual Japanese retail foreign exchange investors take small positions but collectively have accounted for an increasing share of FX market activity in recent years.
The AUD/JPY weakness might also extend into August because the month is historically the most bearish on average, according to Trinh, who cited data covering the past 19 years.
Naoya Aoto, director of the office of financial instruments and exchange law at Japan's FSA in Tokyo, which oversees the new regulation, told Asia Risk in an interview last year the regulator was aware of 41 brokers offering leverage exceeding 100 times and 36 FX brokers offering leverage from 50 to 100 times.
At the end of June 2009, the retail market has a margin balance of ¥100 billion for exchange-based trades and approximately ¥496.4 billion for over-the-counter trades, according to the Japan FSA.