Investors remain short of big yen despite BoJ intervention

The Bank of Japan’s intervention to support the yen this week comes as hedge funds and asset managers have built up large short positions against the currency. With billions of dollars at stake, many say they are staying put for now.

The yen has fallen victim to the remarkable strength of the dollar this year, hitting its weakest level against the US currency in 24 years on Thursday just before the BoJ’s decision. It has been losing value since the start of the year, a move that accelerated after the Federal Reserve signaled its intention to implement rate hikes at one of the fastest clips in years.

This weakness has drawn bets from investors betting that the yen still has some way to go. And despite the BoJ’s bid to bolster the currency, investors and analysts said they don’t expect a massive unwinding of short positions any time soon.

While intervention could support the yen in the very short term, they argued that the only way it would appreciate significantly for an extended period would be if Japan’s central bank raised rates or the Fed started to cut. ease its monetary policy. No results are widely expected.

The $1.2 billion in foreign currency reserves the BoJ holds are likely to provide a buffer. But investors have stressed that these reserves are limited and only provide a temporary solution.

“The BoJ may be successful in dislodging a certain amount of short-term interest in the short term, but longer term this is not a sustainable policy,” said David Rossmiller, head of portfolio management at Bessemer Trust. . “That’s not going to get the shorts out.”

Speculators have a net short position of around $7 billion against the yen, according to data from the Commodity Futures Trading Commission – the largest since early June.

“It doesn’t change anything because the main reason the yen has been weak is the Bank of Japan’s monetary stance, and that hasn’t changed, despite the significant rise in interest rates across the rest of the world,” said a hedge fund. trader who shorted the currency.

Mazen Issa, strategist at TD Securities, said: “Doing unilateral FX intervention is a losing proposition. The Fed is raising rates, so there is a limited number of interventions you can make. You are fighting against the market.

The dollar hit its highest level in decades this year as the Fed launched its monetary tightening campaign. The dollar index, which measures the greenback against a basket of six rivals, hit a new 20-year high on Wednesday after the US central bank raised interest rates by 0.75 percentage points to the third consecutive time.

Higher interest rates on US Treasuries attracted foreign investors, also strengthening the dollar. Currencies around the world have borne the brunt of the soaring dollar – but Japan has been particularly hard hit as its central bank has kept interest rates in negative territory since the Great Financial Crisis.

Line graph of number of yen contracts, net showing that speculators have the largest short position in the yen since June

Sam Lynton-Brown, Head of Global Macro Strategy at BNP Paribas, said: “Our view is [the dollar versus the yen] is going to stay high until the point where US yields start to pull back or . . . the market materially price[s] in a possible normalization of monetary policy in Japan.

Karl Schamotta, chief market strategist at Corpay, said: “Even with huge foreign exchange reserves at their disposal, the Japanese authorities cannot reverse the trend. Fundamental performance gaps are widening interest rate differentials, and the yen is falling for good reason.

However, some analysts predict the BoJ will do more to halt the yen’s decline, seeing this week’s intervention as the first of several steps.

The wild card would be if the BoJ raises rates. Betting he will was such a bad bet that he became known as the “widow maker” trade. But the monetary intervention was unexpected, raising the prospect of another unforeseen move.

Shahab Jalinoos, global head of FX strategy at Credit Suisse, said if this week’s gambit by the BoJ doesn’t have the intended effect, “then the odds go up. . . that at one of the next meetings of the BoJ, monetary policy should change”.

Robert D. Coleman