The yen is heading for a 2.3% weekly gain against the dollar, its sharpest since the joint US-Japan intervention in late July. Traders who spent years betting against the currency are now unwinding those bets as BOJ rate-hike odds jump, Japanese investors repatriate capital, and carry trades come under pressure.
Just six weeks after touching a four-decade low against the dollar, the yen is turning. A mix of central bank policy shifts, capital flows, and speculative positioning is now working against the traders who had bet on further yen weakness. The yen is set for a 2.3% gain against the dollar this week, its sharpest since the joint U.S.-Japan currency intervention at the end of July.
BOJ rate-hike odds jump to 97%
Markets now put the odds of a 25-basis-point BOJ hike this month at 97%, up from 52% a month ago, according to Tokyo Tanshi data. The same data show a 27% chance of a further increase in October and 56% odds in December. A 50 bp move in September is still seen as unlikely under BOJ Governor Kazuo Ueda's cautious leadership, but BOJ board member Hajime Takata, the sole dissenter to the July decision to hold rates, has raised the possibility of a 50 bp move or quicker successive hikes.
Data from Citigroup show yen positioning has flipped from bearish to bullish since the start of August, with leveraged funds, banks and real-money investors all net buying yen this week.
Capital repatriation adds pressure
A sharp rise in Japanese government bond yields is pushing domestic institutional investors to bring money home. Japanese investors are shedding foreign bonds at the fastest pace in four years, following July's shudder through global markets when Japan floated a possible pivot of its $1.8 trillion Government Pension Investment Fund back into domestic assets. Real money short-underweight positions on the yen are at their highest in five years, according to State Street data.
Carry trade unwind risk builds
J.P. Morgan estimates yen shorts have built up to around 17 trillion yen ($108.74 billion) since Prime Minister Sanae Takaichi took office last October. According to Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments: "The market psychology around the yen appears to be changing." J.P. Morgan analysts Junya Tanase and Ikue Saito wrote that a full unwind of that positioning could send USD/JPY down to the 142-146 range.
Traders also trimmed bets on a U.S. rate increase this month after dovish comments from Fed governor Christopher Waller, narrowing a rate gap that has been a major driver of yen weakness.
Source: Investing.com
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