Miscalculated the situation, the yen fell 4.6% last week, but hedge funds turned to long yen

Some investors are anticipating further depreciation of the Japanese yen in the short term, while also suggesting that a drop to 150 could present a potential buying opportunity. Last week, the yen recorded its worst weekly performance since 2009, largely due to dovish comments on interest rates from Japan’s new Prime Minister and unexpectedly strong job numbers from the U.S. Interestingly, during this same week, hedge funds began to adjust their strategies, taking long positions on the yen.

Data from the Commodity Futures Trading Commission reveals that for the week ending October 1, investors shifted to a net long position on the yen for the first time since mid-August. This change coincides with Prime Minister Kishida’s indication that Japan isn’t ready for further interest rate hikes.

U.S. non-farm payroll figures surpassed all projections, boosting demand for the dollar and leading the market to dismiss the likelihood of significant Fed rate cuts in the near future.

In an interview, Yuujiro Goto, head of foreign exchange strategy at Nomura Securities, observed, “Some hedge funds initially took long positions on the yen at the start of last week, expecting a stronger stance from the new Prime Minister. However, the unexpectedly robust employment data raised the probability that the dollar-yen exchange rate could test the 150 level in the short term.”

The yen dropped by 4.6% against the dollar last week, marking its largest decline since December 2009. In response, investors, including hedge funds, have begun to rebuild short positions on the yen.

This week, U.S. inflation data will provide further clarity on the Fed’s policy direction and its potential impact on the yen. On Monday, the dollar-yen exchange rate remained relatively stable at 148.56.

In a conversation with Bloomberg TV, Shohei Omori, chief strategist at Mizuho Securities in Tokyo, commented, “If investors involved in yield spread trading choose to re-enter and test the 160 level, who’s going to stop them? I wouldn’t be surprised if we see 150 or even 155 in the short term.”

Some investors view the yen’s selling pressure as a buying opportunity. Experts continue to predict that the yen will strengthen next year as the Bank of Japan raises interest rates, with a Bloomberg survey indicating a median forecast for the dollar-yen exchange rate at 140 for Q2.

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management in London, expressed that while the yen may weaken further in the short term, a drop to 150 could signal an opportune time to go long on the currency.

Maximillian Lin, a strategist at the Canadian Imperial Bank of Commerce, added, “Considering the changing expectations regarding the Fed, I wouldn’t be surprised to see the October 8th CFTC data reflecting a reversal in short positions on the yen. It all hinges on U.S. economic data and how the Fed responds.”