Yen rally sparks hedge fund short-squeeze fears

The yen rose sharply in Asian trading after hedge funds and macro managers reduced net short positions amid concern Japanese authorities could intervene in currency markets again. The currency gained as much as 1% against the US dollar, briefly trading at its strongest level in about three months, and strengthened against the euro, sterling and commodity-linked currencies.

Positioning data from the US Commodity Futures Trading Commission showed net short yen bets by asset managers and leveraged funds reached their highest level in 2024 in the week ending July 28. Hedge funds’ overall bearish exposure remained close to levels last seen in 2007, creating a concentrated position that market participants said can unwind quickly.

Traders cut bearish exposure on Monday following last week’s coordinated action by Japanese and US authorities. Japan’s finance ministry confirmed the joint intervention, and central bank data indicated officials may have bought about $59 billion of yen in a single day during the operation, the first coordinated action in 15 years.

Some analysts estimate that if speculative positions shift from net short to net long, dollar-yen could move closer to the 150 level. The concentration of short bets has left the market sensitive to rapid position changes.

The yen’s gains weighed on the dollar more broadly. The euro reached its highest level in roughly six weeks, sterling remained near recent highs, and the Australian and New Zealand dollars strengthened as the greenback weakened.

Market participants note that several years of low Japanese interest rates, linked to the Bank of Japan’s cautious approach to tightening, encouraged investors to fund carry trades in yen. Longer-term yen strength will be linked to policy decisions in Tokyo and measures that encourage Japanese investors to repatriate overseas assets.

Geopolitical remarks from US leaders that planned military action against Iran was called off in favour of renewed diplomatic talks reduced demand for safe-haven assets and added pressure on the dollar. Attention now turns to Friday’s US non-farm payrolls report, which is expected to influence expectations for Federal Reserve policy ahead of its September meeting.