Yen roars back as hedge funds cut, run from big macro short

Bloomberg

The yen catapulted higher against major peers as lowered expectations for rate hikes caused hedge funds to cover short bets from one of the biggest global macro trades of the year.
In early trading the yen strengthened more than 1% to 135.11 per dollar, as hedge funds liquidated long positions in the greenback, according to Asia-based currency traders. It jumped by a similar amount against the euro and Australian dollar.
The sharp moves suggested that short-yen strategies — a popular macro trade this year — are hitting limits as investors consider how recession risks could lead to less aggressive rate hikes by major central banks. That would alleviate pressure on the Bank of Japan, whose negative rate policy led to a wide gap with the rest of the world and pushed the yen to a 24-year low against the dollar.
“A post-FOMC unwinding of dollar longs is not unexpected,” and the yen could strengthen close to the 133 level, said Christopher Wong, senior foreign-exchange strategist at Malayan Banking Bhd. “Dollar-yen should really be much lower if markets are anticipating some sort of global recession.”
Treasury yields fluctuated after Fed Chair Jerome Powell offered less clear guidance on future rate moves, something markets took as a sign the central bank is turning slightly dovish amid indications of a slowing economy. The spread between benchmark 10-year yields in the US and Japan has fallen over 60 basis points from a peak in June.
Speculators had been paring some of their bearish yen bets with net-short non-commercial positions falling to the lowest this year at the end of June, according to data from the Commodity Futures Trading Commission. But sizeable shorts remain and hedging costs have continued to push higher amid a debate whether the yen could fall through the closely-watched 140 level.
Some strategists see the yen strength — and recent pause in dollar’s rally — as temporary.
“At the moment the dollar-yen looks like it could remain under further pressure in the very short term,” said Laura Fitzsimmons, executive director of macro rates and FX sales at JPMorgan’s Australian unit. But “unless you see a shift in the BOJ’s tone,” the short-yen macro trade is still on.
The yen’s advance will at least be welcomed by Bank of Japan Governor Haruhiko Kuroda, who risked further currency weakness by standing firm with a policy of rock-bottom interest rates.
Japan’s benchmark yield dropped to the lowest in four months this week in a sign his strategy to beat back speculative bond shorts is bearing fruit.
“Kuroda already won last week after the market largely gave up betting on much higher JGB yields,” said Alvin Tan, strategist at RBC Capital Markets. “The yen’s move is more like a cherry on top.”