ORLANDO, Fla. – Hedge funds remain bullish on the dollar, holding a net long dollar position in currency futures markets for more than nine months. But remove the Japanese yen from the equation, and the picture is much more blurred.
US futures market data show that speculators trimmed the value of their overall long dollar position against a range of currencies for a second week, but increased their net short yen position to the largest in three and a half years.
Indeed, there are only a handful of periods since Commodity Futures Trading Commission (CFTC) yen futures contracts were launched in 1986 where funds have been more bearish on the Japanese currency than they are right now.
The latest CFTC data for the week ending April 12 show that funds increased their net short yen position to 111,827 contracts from the previous week’s 103,829.
That is the biggest since October, 2018. As the following chart shows, it is approaching historic levels.
The size of that bet against the yen in dollar terms is large, but not quite as extreme. It stands at $11.15 billion, the biggest since November last year and up from $10.5 billion the week before.
Buying dollars and selling yen has been the one FX trade that speculators have got spectacularly right this year, as the divergence between US and Japanese interest rates and bond yields in the dollar’s favor has exploded.
The Federal Reserve is in the early stages of what is shaping up to be the most aggressive inflation-busting cycle of interest rate rises since 1994. The Bank of Japan, meanwhile, is sticking with its massive stimulus program to support a fragile economic recovery.
The dollar made a fresh 20-year high last week above 125.85 yen and on Monday it nudged 127.00 yen, lifting the broader dollar index to a two-year peak.
Japanese policymakers have voiced disquiet about the yen’s decline. But it may require more than well-intentioned words to stop the rot.
“The prospects of a change in the yen’s depreciation trend will ultimately be determined by US-Japan monetary policy divergence and, hence, global inflation trends,” Barclays analyst Shinichiro Kadota wrote on Monday. Selling pressure on the yen should persist in the near term, he added.
