Hedge funds have made their most significant retreat from bearish yen bets since 2011 as the once-popular carry trade strategy falters, with leveraged investors cutting 56,639 net short positions on Japan’s currency over the two weeks ending 23 July, according to a report by Bloomberg.
The report cites data from the Commodity Futures Trading Commission in revealing that hedge funds, despite still holding short positions, are now the least bearish on the yen since February, driven by expectations that Japan’s interest rates might finally rise.
The yen’s recent strength has also led to the widespread unwinding of the carry trade, where low-yield currencies like the yen fund investments in higher-yield currencies such as the Mexican peso.
This week will be crucial for the yen, with both the Bank of Japan and the Federal Reserve set to announce policy decisions. Swaps traders are pricing in about a 50% chance of a BOJ rate hike on Wednesday. Any dovish commentary from BOJ officials could undermine the yen’s recent gains.
The yen has appreciated by about 5% following a suspected double-whammy market intervention by Japanese authorities earlier this month. As of Monday, the yen was trading relatively stable against the dollar at around 153.59.
