Yen Stages Comeback as Hedge Funds Trim Bets on US Rate Hikes

The yen catapulted higher against major peers on Thursday as lowered expectations for US hikes caused traders to cover bearish bets on the rate-sensitive Japanese currency.

In early trading the yen strengthened more than 1% to 135.11 per dollar, extending an overnight rise to hit a three-week high. It jumped by a similar amount against the euro and the Australian dollar.

Hedge funds have started to liquidate their long dollar-yen positions, according to Asia-based currency traders who asked not to be named as they are not authorized to discuss client activity publicly. But larger flows from institutions and reserve managers are yet to be seen, they said.

The sharp moves suggested that short-yen strategies — one of the most popular macro trades this year — are hitting limits as investors consider how recession risks could lead to less aggressive rate hikes by major central banks. That will alleviate pressure on the Bank of Japan, whose negative rate policy has led to a wide gap with the rest of the world and pushed the yen to a 24-year low against the dollar.

Big Yen Short in Doubt for Global Traders Even as Tokyo Piles In

Treasury yields fell Wednesday after Fed Chair Jerome Powell offered less clear guidance on future rate moves, something markets took as a sign the central bank is turning slightly dovish amid indications of a slowing economy.

“A post-FOMC unwinding of dollar longs is not unexpected,” and the yen could strengthen close to the 133 level, said Christopher Wong, senior foreign-exchange strategist at Malayan Banking Bhd. “Dollar-yen should really be much lower if markets are anticipating some sort of global recession.”

Speculators had been paring some of their bearish yen bets with net-short non-commercial positions falling to the lowest this year at the end of June, according to data from the Commodity Futures Trading Commission. But sizeable shorts remain and hedging costs have continued to push higher amid a debate whether the yen could fall through the closely-watched 140 level.

The yen’s advance will be welcomed by Bank of Japan Governor Haruhiko Kuroda, who risked further currency weakness last week by standing firm with a policy of rock-bottom interest rates.

“Kuroda already won last week after the market largely gave up betting on much higher JGB yields,” said Alvin Tan, strategist at RBC Capital Markets in Hong Kong. “The yen’s move is more like a cherry on top.”