Column-Funds move into yen for first time in four years: McGeever by Reuters

By Jamie McGeever

ORLANDO, Florida (Reuters) – To an extent, the Japanese yen-backed speculative carry exchange has been completely undone.

The latest data from the Commodity Futures Trading Commission shows that hedge funds and speculators have reversed their long short position in the yen and are now net long of the currency for the first time since March 2021.

It may have taken a lot in recent weeks to trigger the shift – a rise in Japanese rates, yen-buying intervention and a burst in haven demand amid a historic spike in US stock market volatility earlier this month – , but the turnaround was quick. .

Data for the week ended Aug. 13 shows funds held a net long position of just over 23,000 contracts, effectively a bullish bet on the currency worth $2 billion.

Just seven weeks ago, they were net short, to the tune of 184,000 contracts. That was the largest short position in 17 years, a $14 billion bet against the currency. The magnitude and speed of the change in bullish momentum in July and so far this month is historic.

A short position is essentially a bet that an asset will fall in value, and a long position is a bet that its price will rise.

As analysts at Rabobank point out, the yen was the best performing G10 currency against the dollar in July, rising more than 7%. But it has started to fall again as the volume shock from August 5 fades and investors regain their appetite for risk.

The question now is whether CFTC funds and speculators in general are inclined to return to yen-backed carry trades or not. There are compelling arguments on both sides.

The bar for extending long yen positions and further appreciation of the yen may be higher. The US economy is still growing at a decent pace – an annualized rate of 2%, according to the latest Atlanta Fed GDPNow model estimate – and the dollar’s interest rate and yield advantage over the yen remains substantial.

The yen carry trade – selling the yen to fund the purchase of higher-yielding currencies or assets – is an attractive strategy from a fundamental perspective, despite the recent turmoil.

“We remain of the view that it is difficult for the dollar (or yen bullish) to decline substantially or sustainably in the current environment,” FX analysts at Goldman Sachs wrote on Friday.

On the other hand, the recent turmoil is not completely in the rearview mirror, and volatility may remain above pre-August 5 levels for some time to come. This is bad for carry trades, which rely on low and stable volatility.

One-week to six-month USD/Yen implied volatility measures are all higher, especially further along the curve. It may take a more significant drop in volatility before speculators consider shorting the yen again.

And Friday’s figures are expected to show that Japan’s inflation rose to 2.7% last month, the highest since February, with the Bank of Japan likely to continue to tighten policy. While the Fed is about to start cutting rates.

“While the (US-Japan) spread will remain attractive, the danger is that we have entered a period of more sustained volatility that will encourage further liquidation of yen carry positions in the coming months,” he wrote on Friday Morgan Stanley’s currency strategy team. .

(The opinions expressed here are those of the author, columnist at Reuters)

(By Jamie McGeever; Editing by Michael Perry)