After experiencing significant fluctuations in the Japanese yen exchange rate market over the past few weeks, arbitrage trades in the yen have been heavily liquidated. This has led to hedge funds turning net long yen for the first time since 2021.
According to the latest data from the Commodity Futures Trading Commission (CFTC) for the week ending August 13th, hedge fund traders have now turned net long on the Japanese yen.
In early July, there was an extreme bearish sentiment towards the Japanese yen in the market, but just a few weeks later, this market sentiment underwent a sharp change.
Hedge fund net bullish on Japanese yen for the first time in nearly three years
According to CFTC data, as of the week ending August 13th, hedge funds held a net of 86 yen long contracts worth approximately $7 million. Although this data is small, it is already the first time in nearly three years that hedge funds have been net bullish on the Japanese yen.
As a comparison, since 2021, hedge funds have held an average net of nearly 50000 yen short contracts per week. During the week of August 6th, hedge funds still held a net of nearly 20000 yen short contracts.
Before hedge funds adjusted their positions, the yen rose due to market speculation that the Bank of Japan would continue to raise interest rates. Although officials from the Bank of Japan later cooled down these expectations, this exchange rate volatility has led some investors to begin liquidating yen arbitrage trades.
One of the main driving forces behind the previous decline of the Japanese yen was the yen arbitrage trading. In the low interest rate environment of Japan, a large number of traders borrow funds at low prices to purchase assets with higher overseas returns. This caused the Japanese yen to fall to a new low against the US dollar in nearly 40 years.
But since early July, the Japanese yen has appreciated by about 9% against the US dollar, outperforming other currencies in G10 countries. Under this upward trend, a large number of yen arbitrage traders began to close their positions. Meanwhile, as shown by CFTC data, hedge funds have been reducing their short positions in the yen since early July.
Akira Moroga, Chief Market Strategist at Aozora Bank, said before the release of the CFTC report, "It is difficult to assume that short positions in the yen will continue to increase as they have in the past, and closing arbitrage trades may support the yen... Panic driven position adjustments are expected to end, and investors will also make renewed efforts to buy yen
Could Japanese yen bears make a comeback?
At present, the outlook for the yen's trend will still depend on the expressions of both the Federal Reserve and the Bank of Japan.
On the one hand, traders are carefully studying macroeconomic data in the United States to determine the timing and speed of the Fed's interest rate cuts, while waiting for Fed Chairman Powell's speech at the Jackson Hole annual meeting this week.
On the other hand, Bank of Japan Governor Kazuo Ueda will deliver a speech in parliament on August 23, which may further clarify the path of interest rates.
Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, stated:
&Amp; quot; It seems that the overall trend of closing positions in yen arbitrage trading is still continuing... However, since the volatility level of the yen has clearly stabilized, I suspect we will see an increase in some short positions in the yen.