Hedge funds significantly reduced their bearish exposure to the yen following coordinated efforts by US and Japanese officials to stabilise the currency, reversing a large build-up in short positions earlier this summer, according to a report by Bloomberg.
The report cites data from the Commodity Futures Trading Commission (CFTC) as showing that leveraged investors cut their net short yen position in futures and options markets by around half, to about 63,600 contracts as of 4 August.
That represents a substantial retreat from late June, when hedge funds and other leveraged traders held almost 138,000 net short contracts — their largest bearish position against the yen since 2007.
The aggressive positioning had built as the Japanese currency fell to its weakest level since 1986. The wide interest-rate gap between the US and Japan had encouraged investors to maintain bets that the yen would continue to weaken.
Those trades began to unwind after US and Japanese authorities took coordinated steps to support the currency, prompting traders to reassess the risk of remaining heavily short.
The shift in positioning has also been supported by changing expectations for monetary policy in both countries.
The Bank of Japan kept its benchmark interest rate unchanged at its latest meeting, but overnight index swaps now indicate roughly a 60% probability of a rate increase by September.
At the same time, expectations for US monetary policy have moved in a less hawkish direction. A weaker-than-expected US employment report put pressure on the dollar and reduced expectations of further Federal Reserve tightening.
Markets are now pricing roughly a 40% probability of a US rate increase next month, compared with about 60% before the payrolls figures were released.
For hedge funds that had accumulated one of the largest yen short positions in years, the combination of official intervention risk and shifting interest-rate expectations has made maintaining those trades considerably less attractive.
The rapid reduction in short exposure also highlights the potential for further volatility in the yen if traders continue to unwind bearish positions, particularly if expectations for a Bank of Japan rate increase strengthen or US rate expectations shift further.
