Yen Carry Bets Unravel as Japanese Yen Strengthens
Yen carry bets in the global monetary market have quickly unraveled as the Japanese yen has gained ground against the US dollar over the past month, reaching a 37-year high. This is evident in the net short position in yen futures, particularly in the non-commercial sector on the Chicago Mercantile Exchange. Recent data shows a significant drop in these positions, with a peak of 184,000 futures on July 2 dropping to just 11,000 contracts as of Tuesday.
The Japanese yen hit its lowest level in over four decades earlier this month at ¥161.94 per dollar but has since recovered to ¥141.69 after the Bank of Japan decided to increase its policy interest rate on July 31.
Yen carry trading involves borrowing low-interest yen and selling it to pay for higher-yielding foreign currencies. A change in market expectations regarding interest rates in both Japan and the United States triggered a sudden reversal of these holdings.
In early July, high inflationary pressures in the United States dampened expectations for an imminent Federal Reserve interest rate cut. However, after employment data was released by the US government on August 2 indicating a possible economic downturn, investors began anticipating a rate reduction in September.
Meanwhile, there has been a shift in monetary policy posture by the Bank of Japan. After their recent rate increase on July 31st, BOJ Governor Kazuo Ueda hinted at another potential rate rise later this year. This change has contributed to unwinding large yen short bets.
Currency analyst Shota Ryu from Mitsubishi UFJ Morgan Stanley Securities Co., commented that ”excessive yen short positions have been unwound” due to current market swings.
Despite this surge by the yen, some observers believe that this pattern cannot last indefinitely given that “the interest rate gap between Japan and United States is still wide,” according to Shinichiro Kadota from Barclays Securities Japan LTD., who added that “yen carry trade could revive once market fears ease.”
The recent statement made by BOJ Deputy Governor Shinichi Uchida suggesting that interest rates would not be increased during times of financial market uncertainty seemed to slightly halt upward momentum for the yen.
As we await further developments and observe local and foreign economic data closely while monitoring fluctuations within currency markets, it remains uncertain how long this rally for yen carry trades will continue.
