Hedge Funds Turn Bullish On Yen After Carry Trade Blow-Up

(Bloomberg) -- Hedge funds turned bullish on Japan’s currency for the first time since 2021 after sharp swings in foreign-exchange markets led to a blow-up of a popular yen trade.

Speculative traders are, on net, positioning for gains in the yen, according to the latest Commodity Futures Trading Commission data, which covers the week ending Aug. 13. This marks a sharp turnaround from the extremely negative sentiment seen among these traders as recently as early July.

Leveraged funds held 86 contracts worth about $7 million tied to wagers the yen will rise, according to CFTC data.

The shift in positioning comes after a rally in the yen tied to bets the Bank of Japan will keep raising interest rates. While officials have since cooled those expectations, the volatility caused investors to bail out on so-called yen carry trades — in which they’d been borrowing cheaply in Japan to buy higher-yielding assets abroad. 

The yen has strengthened about 9% against the dollar since the start of July, outperforming all of its Group-of-10 currency peers. 

The latest data compares to the roughly 20,000 contracts held a week earlier by speculative traders representing bets for a weaker yen. These traders have been paring back their bearish sentiment, as demonstrated in CFTC data, since early July. 

“Looks like the trend to unwind yen carry positions continued in aggregate,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston. “However, now that volatility levels have reverted back meaningfully, I suspect we will see some positioning pick up in short yen.”

The yen rose more than 1% on Friday, touching 147.63 per dollar. Even so, the currency remains weaker against the greenback this week, which has pushed some money managers to re-engage in the yen-centered carry trade. Japanese rates remain lower than those in the US.

“It is difficult to assume that the yen selling position will build up as it has in the past, and unwinding of the position is likely to support the yen,” Akira Moroga, chief market strategist at Aozora Bank, said before the CFTC report. “Panic position adjustments are expected to end, and a renewed effort to carry the yen is also anticipated.”

Traders are poring over US macro data to gauge the timing and the speed of the Federal Reserve rate reductions as they wait for Fed Chair Jerome Powell to speak on the economic outlook next week. BOJ Governor Kazuo Ueda is due to speak before parliament on Aug. 23 and may offer further clarity on the rates path. 

--With assistance from Daisuke Sakai.

(Updates with chart, comment and context throughout.)

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