Hedge Funds Bought Yen Right Before Biggest Drop in 15 Years

(Bloomberg) — Hedge funds turned bullish on the yen just before dovish comments by Japan’s new prime minister and a robust US jobs report helped spark the worst week for Japan’s currency since late 2009.

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Speculative investors flipped to a net long position on the yen for the first time since mid-August, Commodity Futures Trading Commission data for the week to Oct. 1 showed. The buying came right before Prime Minister Shigeru Ishiba said the nation wasn’t ready for further interest rate hikes.

US nonfarm payrolls data that was higher than all estimates further bolstered demand for the greenback and prompted the markets to price out another big Federal Reserve rate cut next month.

“Some hedge funds positioned for yen longs earlier last week with expectations for a more hawkish stance by new PM Ishiba,” said Yujiro Goto, head of FX strategy at Nomura Securities Co. Now, “the unexpected strength of the employment data has increased the possibility that the dollar-yen rate will test the 150 level in the near term.”

Japan’s currency tumbled 4.4% against the dollar last week, its worst loss since December 2009 as the jobs surprise and Ishiba’s commentary spurred a rethink on the yen’s path. Investors including some hedge funds have begun re-loading short yen bets in risky carry trades, reflecting bearish sentiment on the currency.

Japan’s chief currency official Atsushi Mimura said that he’s watching the FX market with a sense of urgency, including what happens to speculative moves. The country’s new finance minister Katsunobu Kato also warned that the sudden yen moves hurt companies and households.

US inflation data later this week will provide further clues on the Fed’s policy path and the yen’s trajectory. The currency traded at 148.38 per dollar at 3:51 p.m. Tokyo time.

If investors who ply the carry trade “come on again and test 160, who is going to stop that?” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo. “I see 150 in the near-term,” or even 155, he said in a Bloomberg Television interview.

Hedge funds were the most bullish on Japan’s currency since early 2021, CFTC data showed.

Further to Go

Some are eyeing the selloff as a chance to buy yen.

Strategists still see further strength next year as the Bank of Japan hikes rates, with the median forecast for dollar-yen at 140 in the second quarter, Bloomberg-compiled data show.

“This move may have a bit further to go in the short term,” Mark Dowding, chief investment officer of RBC BlueBay Asset Management in London, wrote about the yen’s weakness. However, a slide toward 150 “could represent an attractive time to start to build a long position in the Japanese currency.”

The CFTC data is also released with a lag, which means leveraged investors might have reacted to Ishiba’s dovish comments and are now positioning for fresh bouts of weakness.

“I would not be surprised if the upcoming CFTC data for Oct. 8 shows a reversal in yen longs, given the shift in Fed expectations,” said Maximillian Lin, strategist at Canadian Imperial Bank of Commerce. “It’s really all about US data” and the Fed’s reaction, he said.

–With assistance from Shery Ahn.

(Adds comments by Japan’s top currency official and finance minister, and updates dollar/yen level)