ORLANDO, Florida, Sept 15 (Askume) – Hedge funds are the most bullish on the yen in eight years, but volatility is rising as their “long” positions grow and the yen strengthens.
This raises the question of whether the recent dramatic turnaround in the yen’s fortunes, driven by a rapid shift in speculators’ positioning, is “too fast” and whether at least a period of consolidation is needed.
The yen has risen 15% against the US dollar since mid-July and is now slightly stronger against the US dollar than at the beginning of the year . Data from the US Commodity Futures Trading Commission showed that hedge funds and speculators now have the largest net long position in the yen since October 2016.
Data for the week ended September 10 showed funds held a net long position of 55,770 contracts, equivalent to about $5 billion worth of bullish bets on the currency.
In US dollar terms, this is the biggest “long” move since February 2021. As measured by net holdings of CFTC contracts, this is the most bullish a fund has been on the yen in eight years.
A long position is essentially a bet that the value of an asset will rise, while a short position is a bet that the value of an asset will fall.
This is helpful in understanding the current situation of hedge funds. CFTC data shows that since the yen futures contract was launched in 1986, funds have held large net long positions for only 33 weeks. 16 of them were concentrated between February and October 2016.
Whether it is reducing its net short position or increasing its net long position, the fund has remained bullish on the yen for 10 consecutive weeks. The last time this happened was in 2012.
There are good fundamental economic reasons behind this, the most important of which is that the US and Japanese central banks are pursuing different policy paths – the Federal Reserve is about to begin an interest rate cutting cycle, and the Bank of Japan has already cut interest rates to historical lows.
Interest rate traders expect the Federal Reserve to cut rates by about 250 basis points by the end of next year and the Bank of Japan to raise rates by 30 basis points.
The two-year and ten-year yield spreads between the United States and Japan are currently 320 basis points and 280 basis points, respectively, the lowest levels in the past two years. At the end of last year, they were above 500 basis points and 400 basis points, respectively.
Much of this contraction has been reflected in exchange rate values. It is worth noting that the Yen has risen more against the US Dollar this year and is set to top $140.00 per dollar soon.
But currency traders know that a strong yen, especially a sudden price increase, is often associated with investors’ risk aversion, economic or financial market turmoil, and increased demand for “safe” assets in uncertain times.
Do these conditions still exist? Perhaps. The yen’s rise has been very strong and rapid as traders have exhausted the so-called “yen carry trade” and uncertainty remains over the outlook for the US economy, the Federal Reserve and the Bank of Japan.
So it’s no surprise that the Japanese Yen is also highly volatile. Three-month implied volatility is currently around 12.00, the highest since March last year, and one-month implied volatility recently hit 15.00, the first time since January last year.
The Federal Reserve and the Bank of Japan will announce their latest policy decisions and outlook this week, and yen fluctuations may continue for some time due to speculation.
(The views expressed here are those of the author, Askume columnist)
The views expressed are those of the author. They do not reflect the views of Askume News, which is committed to integrity, independence and non-partisanship in accordance with the principles of trust.
