The yen is on track for its best week since a rare joint U.S.-Japan intervention in July, rising roughly 2% against the dollar as traders unwind long-held bets against the currency. Rising odds of a September Bank of Japan rate hike, capital repatriation by Japanese investors and softer Fed rate-hike bets are combining to squeeze yen short positions built up over years.
Yen shorts start to unwind
Six weeks after touching a four-decade low against the dollar, the yen is gaining roughly 2% this week, its sharpest move since the coordinated U.S.-Japan intervention at the end of July. Data from Citigroup show positioning on the yen has flipped from bearish to bullish since early August, with leveraged funds, banks and real-money investors all net buyers this week.
"The market psychology around the yen appears to be changing," said Rong Ren Goh, a fixed income portfolio manager at Eastspring Investments. According to Reuters: "Investors seem increasingly reluctant to aggressively short the JPY (yen)". The yen is also up almost 2% against the euro and the Australian dollar this week.
Rate-hike odds jump
Markets now put the odds of a 25-basis-point BOJ rate hike this month at 97%, according to Tokyo Tanshi data, up from 52% a month ago. A 50-bps move is still seen as unlikely under Governor Kazuo Ueda's cautious leadership, but BOJ board member Hajime Takata, the sole dissenter to July's decision to hold rates, has raised the prospect of faster, back-to-back hikes.
Meanwhile 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, a shift State Street's Bart Wakabayashi called the biggest single factor behind the move, ahead of the BOJ rate story itself.
A crowded short trade at risk
The yen has long served as the funding currency for carry trades, where investors borrow cheaply in yen to invest elsewhere. Stephen Jen of Eurizon SLJ Asset Management compared the risk of a rapid unwind to the 1998 collapse of Long-Term Capital Management, when banks and funds were forced to deleverage quickly.
JPMorgan estimates yen shorts have built up to around 17 trillion yen ($109 billion) since Prime Minister Sanae Takaichi took office last October. Analysts Junya Tanase and Ikue Saito wrote that if this position were fully unwound, USD/JPY could fall to the 142-146 range. The Federal Reserve is also a factor: traders trimmed U.S. rate-hike bets this month after dovish comments from Fed Governor Christopher Waller, narrowing the rate gap that has weighed on the yen.
Source: Investing.com (Reuters)
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