By Jamie McGeever
ORLANDO, Florida (Reuters) – By one measure, the speculative Japanese yen-funded carry trade has been fully unwound.
The latest data from the Commodity Futures Trading Commission shows that hedge funds and speculators have reversed their long-standing short positions in the yen and are now net long the currency for the first time since March 2021.
It may have taken a lot in recent weeks to trigger the turnaround – an aggressive Japanese rate hike, a yen buying intervention and a burst of demand for safe havens amid the historic spike in US stock market volatility early this month – but the turnaround was quick. .
Data for the week ending August 13 shows funds had a net long position of just over 23,000 contracts, essentially a bullish bet on the currency worth $2 billion.
Just seven weeks ago they had a net deficit of 184,000 contracts. That was their largest short position in seventeen years, a $14 billion bet against the currency. The size and speed of the bullish momentum shift in July and so far this month are historic.
A short position is essentially a bet that an asset will fall in value, and a long position is a bet that its price will rise.
Rabobank analysts point out that the yen was the best performing G10 currency against the dollar in July, rising more than 7%. But the price is starting to move lower again as the August 5 volume shock fades and investors regain their risk appetite.
The question now is whether CFTC funds and speculators more broadly will be inclined to return to yen-funded carry trades or not. There are compelling arguments on both sides.
The bar for expanding long positions in the yen and for further appreciation of the yen may be higher. The US economy is still growing at a decent rate (a rate of 2% annually, according to the latest estimate from the Atlanta Fed GDPNow model) and the dollar’s interest and yield advantage over the yen remains significant.
The yen carry trade, which involves selling the yen to finance the purchase of currencies or assets with higher interest rates, is an attractive strategy from a fundamental perspective, despite the recent turmoil.
“We continue to believe that it is difficult for the dollar to decline materially or sustainably (or for the yen to be bullish) in the current environment,” currency analysts at Goldman Sachs wrote on Friday.
On the other hand, the recent turmoil is not yet fully visible in the rearview mirror and volatility may remain above pre-August 5 levels for some time to come. This is bad for carry trades, which rely on low and stable volatility.
Measures of dollar/yen implied volatility from one week to six months ahead are all higher, especially further away from the curve. It may take a more meaningful drop in volatility before speculators consider shorting the yen again.
And Friday’s figures are expected to show that inflation in Japan rose to 2.7% last month, the highest level since February, likely prompting the Bank of Japan to continue tightening policy. While the Fed is about to cut interest rates.
“While the (US-Japan) interest rate spread will remain attractive, there is a danger that we have entered a period of more sustained volatility, which will encourage further liquidation of carry positions in the yen in the coming months,” the FX wrote strategy team at Morgan Stanley Friday. .
(The views expressed here are those of the author, a columnist for Reuters)
(By Jamie McGeever; Editing by Michael Perry)
