Hedge funds bought the yen just before its biggest decline in 15 years

(Bloomberg) — Hedge funds turned bullish on the yen ahead of dovish comments from Japan’s new prime minister and a strong U.S. jobs report helped spark the Japanese currency’s worst week since late of 2009.

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Speculative investors returned to a net long yen position for the first time since mid-August, Commodity Futures Trading Commission data for the week to Oct. 1 showed. The purchase came just before Prime Minister Shigeru Ishiba said the nation was not ready for further interest rate hikes.

U.S. non-farm payrolls data, which came in higher than all estimates, further supported demand for the greenback and led markets to brace for another big rate cut by the Federal Reserve next month.

“Some hedge funds positioned for the yen are looking long early last week with expectations for a more aggressive stance from new Prime Minister Ishiba,” said Yujiro Goto, head of currency strategy at Nomura Securities Co. Now, “unexpected strength in employment data raised the possibility that the dollar-yen rate could test the 150 level in the near term.”

Japan’s currency fell 4.4 percent against the dollar last week, its biggest loss since December 2009, as the jobs surprise and Ishiba’s comment spurred a rethink of the yen’s trajectory. Investors, including some hedge funds, began reloading short yen bets in risky trades, reflecting bearish sentiment on the currency.

Japan’s chief foreign exchange official, Atsushi Mimura, said he was watching the currency market with a sense of urgency, including what was happening with speculative moves. The country’s new finance minister, Katsunobu Kato, also warned that the yen’s sudden moves were hurting companies and households.

US inflation data later this week will provide further clues on the path of Fed policy and the path of the yen. The currency traded at 148.38 per dollar at 15:51 Tokyo time.

If carry investors “come back and test 160, who’s going to stop that?” said Shoki Omori, chief strategist at Mizuho Securities Co. from Tokyo. “I see 150 in the near term,” or even 155, he said in an interview with Bloomberg Television.

Hedge funds were the most bullish on Japan’s currency since the start of 2021, CFTC data showed.

Onward to go

Some view the selloff as a chance to buy the yen.

Strategists still see additional strength next year as the Bank of Japan raises interest rates, with the median forecast for the dollar-yen at 140 in the second quarter, data compiled by Bloomberg showed.

The story continues

“This move may have something to do in the near term,” Mark Dowding, chief investment officer at RBC BlueBay Asset Management in London, wrote of the yen’s weakness. However, a slide towards 150 “could represent an attractive time to start building a long position in the Japanese currency.”

The CFTC data is also being released late, meaning leveraged investors may have reacted to Ishiba’s dovish comments and are now positioning themselves for further bouts of weakness.

“I wouldn’t be surprised if the upcoming CFTC data for Oct. 8 shows a reversal of yen longs given the change in Fed expectations,” said Maximillian Lin, strategist at Canadian Imperial Bank of Commerce. “It’s really all about the US data” and the Fed’s reaction, he said.

–With help from Shery Ahn.

(Adds comments from Japan’s chief currency official and finance minister and updates the dollar/yen level)

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