(Bloomberg) — Hedge funds turned bullish on the yen just before dovish comments by Japan’s recent prime minister and a powerful US jobs report helped spark the worst week for Japan’s currency since late 2009.
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Speculative investors flipped to a net long position on the yen for the first time since mid-August, Commodity Futures Trading Commission data for the week to Oct. 1 showed. The buying came right before Prime Minister Shigeru Ishiba said the nation wasn’t ready for further rate of interest hikes.
US nonfarm payrolls data that was higher than all estimates further bolstered demand for the greenback and prompted the markets to cost out one other big Federal Reserve rate cut next month.
“Some hedge funds positioned for yen longs earlier last week with expectations for a more hawkish stance by recent PM Ishiba,” said Yujiro Goto, head of FX strategy at Nomura Securities Co. Now, “the unexpected strength of the employment data has increased the likelihood that the dollar-yen rate will test the 150 level inside the near term.”
Japan’s currency tumbled 4.4% against the dollar last week, its worst loss since December 2009 since the jobs surprise and Ishiba’s commentary spurred a rethink on the yen’s path. Investors including some hedge funds have begun re-loading short yen bets in dangerous carry trades, reflecting bearish sentiment on the currency.
Japan’s chief currency official Atsushi Mimura said that he’s watching the FX market with a way of urgency, including what happens to speculative moves. The country’s recent finance minister Katsunobu Kato also warned that the sudden yen moves hurt firms and households.
US inflation data later this week will provide further clues on the Fed’s policy path and the yen’s trajectory. The currency traded at 148.38 per dollar at 3:51 p.m. Tokyo time.
If investors who ply the carry trade “come on again and test 160, who’s going to stop that?” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. “I see 150 inside the near-term,” and even 155, he said in a Bloomberg Television interview.
Hedge funds were essentially probably the most bullish on Japan’s currency since early 2021, CFTC data showed.
Further to Go
Some are eyeing the selloff as a likelihood to buy yen.
Strategists still see further strength next 12 months since the Bank of Japan hikes rates, with the median forecast for dollar-yen at 140 inside the second quarter, Bloomberg-compiled data show.
“This move can have a bit further to go inside the short term,” Mark Dowding, chief investment officer of RBC BlueBay Asset Management in London, wrote regarding the yen’s weakness. Nevertheless, a slide toward 150 “could represent a horny time to start out out to construct an prolonged position inside the Japanese currency.”
The CFTC data can be released with a lag, which suggests leveraged investors may have reacted to Ishiba’s dovish comments and for the time being are positioning for fresh bouts of weakness.
“I won’t be surprised if the upcoming CFTC data for Oct. 8 shows a reversal in yen longs, given the shift in Fed expectations,” said Maximillian Lin, strategist at Canadian Imperial Bank of Commerce. “It’s really all about US data” and the Fed’s response, he said.
–With assistance from Shery Ahn.
(Adds comments by Japan’s top currency official and finance minister, and updates dollar/yen level)
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