(Bloomberg) — Hedge funds turned bullish on the yen just before dovish comments from Japan’s new prime minister and a strong U.S. jobs report helped spark the worst week for the Japanese currency since late 2009.
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Speculative investors took a net long position in the yen for the first time since mid-August, Commodity Futures Trading Commission data for the week ended Oct. 1 showed. The purchase came just before Prime Minister Shigeru Ishiba said the nation was not prepared for further interest rate hikes.
The US non-farm payrolls data, which came in above all estimates, further boosted demand for the dollar and led markets to price in another big rate cut from the Federal Reserve next month.
“Some hedge funds took a long-term position on yen early last week on expectations of a more aggressive stance from new Prime Minister Ishiba,” said Yujiro Goto, head of currency strategy at Nomura Securities Co. Now, ” The unexpected strength in employment data has raised the possibility of the dollar-yen exchange rate testing the 150 level in the near term.”
The Japanese currency fell 4.4% against the dollar last week, its worst loss since December 2009, when employment surprised and Ishiba’s comment prompted a rethinking of the yen’s trajectory. Investors, including some hedge funds, have begun loading up on short yen bets in risky carry trades, reflecting bearish sentiment on the currency.
Japan’s top foreign exchange official, Atsushi Mimura, said he is watching the currency market with a sense of urgency, including what happens with speculative moves. The country’s new Finance Minister, Katsunobu Kato, also warned that sudden movements in the yen hurt businesses and households.
This week’s US inflation data will provide more clues about the Federal Reserve’s policy path and the path of the yen. The currency was trading at 148.38 per dollar at 3:51 p.m. Tokyo time.
If carry traders “come back and test 160, who is going to stop that?” said Shoki Omori, chief strategist at Mizuho Securities Co. in Tokyo. “I see 150 in the short term,” or even 155, he said in a Bloomberg Television interview.
Hedge funds were the most bullish on the Japanese currency since the start of 2021, CFTC data showed.
Further to go
Some see the sell-off as an opportunity to buy yen.
Strategists still see further strength next year as the Bank of Japan raises rates, with the median forecast for the dollar-yen at 140 in the second quarter, data compiled by Bloomberg show.
“This move may have a little further to go in the short term,” Mark Dowding, chief investment officer at RBC BlueBay Asset Management in London, wrote of the yen’s weakness. However, a drop towards 150 “could represent an attractive time to start building a long position in the Japanese currency.”
CFTC data is also being released late, meaning leveraged investors may have reacted to Ishiba’s dovish comments and are now positioning for further bouts of weakness.
“I wouldn’t be surprised if the upcoming CFTC data on Oct. 8 shows a reversal of long yen positions, given the change in Fed expectations,” said Maximillian Lin, strategist at the Imperial Bank of Commerce of Canada. “It’s really about US data” and the Federal Reserve’s reaction, he said.
–With the help of Shery Ahn.
(Adds comments from Japan’s top monetary official and finance minister, and updates dollar/yen level)
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