Hedge funds halve yen short positions after US-Japan action

Hedge funds and other leveraged investors reduced their net short positions in the Japanese yen to roughly 63,600 contracts in futures and options as of Aug. 4, according to Commodity Futures Trading Commission data. The reduction followed coordinated US and Japanese steps to support the currency and shifting expectations for central bank policy.

At the end of June, leveraged traders held nearly 138,000 net short contracts, the largest bearish position against the yen since 2007. That position grew as the yen fell to its weakest level since 1986 and the gap between US and Japanese interest rates widened.

Officials in the United States and Japan took coordinated actions to stabilise the yen, after which market participants reassessed their short positions. The short exposure in futures and options fell by about half in just over a month.

Monetary policy expectations also shifted. The Bank of Japan left its benchmark rate unchanged at its most recent meeting. Overnight index swaps priced roughly a 60% chance of a BOJ rate increase by September. Weaker-than-expected US employment data reduced the market-implied probability of a Federal Reserve rate hike next month to about 40%, down from about 60% before the payrolls report.

Hedge funds that had accumulated large short positions cut exposure amid the combination of coordinated currency support and changing rate expectations. The unwind in futures and options markets took place rapidly after the officials’ actions and the change in market-implied policy odds.