A dramatic yen rally is harnessing market momentum, prompting investors to quickly adjust as trend-followers reverse course.
The yen has risen 8% against the dollar in three weeks, and notably, the rally’s pace has surprised market participants.
Funds and trend-following CTAs, having shorted in calmer times, now face losses or new risks as the yen retraced sharply.
By Thursday, at 150 yen per dollar, half the yearly paper gain for yen shorts is lost, making the position increasingly uncomfortable.
With U.S. and Japan policy meetings concluded, analysts suggest leveraged players’ next moves will likely boost the yen further.
“It’s really the price action that drives dollar/yen,” said James Malcolm, macro strategist at UBS.
Thus, as trend-followers align with market signals, a significant move can quickly amplify.
“Sub-152, a lot of these triggers begin to come in for CTAs, not just reducing the dollar longs,” he said.
“But actually starting to turn short dollars in dollar-yen.”
Initially, the yen was the top currency trade due to zero yields and low forex volatility, especially as it steadily declined.
The factors supporting the yen’s stability and low value are changing; a rising stock market and narrowing trade deficit are influencing this shift.
Japanese investors have pulled a net 2.2 trillion yen from foreign equities, surpassing the 621.2 billion yen invested in foreign bonds.
Meanwhile, in four months, the Bank of Japan raised rates twice and ended its yield-capping policy, previously protecting short yen positions.
“We remain convinced that the past two years of yen weakness does not represent a structural shift; the sell-off is cyclical in nature and fully reversible,” said Macquarie strategist Gareth Berry, who forecasts dollar/yen at 125 by the end of 2025.
Market Shifts: Speculators Cut Yen Shorts as BOJ’s Hawkish Stance Changes Technical Outlook
Speculators reduced their bearish yen bets by the most in a month since March 2020, falling 40% from April’s high.
“Dollar/yen technicals have flipped. With a decidedly more hawkish BOJ, markets are now focused on how much they can hike, not if they will,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.
Goh anticipates more yen advances, since the market remains short the currency.
Certainly, the yen remains weak due to Japan’s policy rate being 500 bps below the U.S. rate, with the gap projected to exceed 300 bps even in a year.
However, investors, recalling the 1998 yen-carry trade unwinding, fear similar pain from the yen’s sharp rally and are withdrawing.
Tareck Horchani of Maybank Securities anticipates hedge funds will favor options over ‘naked’ short yen trades amid rising volatility.
Bart Wakabayashi from State Street notes recent extreme yen inflows by non-leveraged investors, balancing underweight yen positions to neutral.
“What’s on everybody’s mind is this positioning fallout and how long is it going to last,” said Wakabayashi.
“We smashed our way through the 200-day moving average … so this process has probably now created a different technical regime”.
Charts indicate the dollar may face resistance at 150.5 yen, potentially placing the pair in a 145-150 range, he said.
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