(Bloomberg) -- Hedge funds are the most bearish on the yen in more than two years as expectations for the world’s post-pandemic recovery mount.
Futures and options speculators have added to yen shorts for three straight weeks after being long the Japanese currency as recently as a month ago, according to data from the Commodity Futures Trading Commission. The speed of the reversal partly explains the yen’s slide last week, when it dropped beyond the level of 110 per dollar for the first time in a year.
Many strategists say the yen is likely to extend declines -- reversing earlier calls for it to strengthen to 100 -- as rising U.S. Treasury yields and better-than-expected economic data turbo-charge the global reflation trade. Japan’s currency has dropped against all its Group-of-10 peers this year, including a loss of 6.7% against the dollar.
“Yen selling is likely to largely stay intact until the U.S. economy strengthens to the point where markets expect the Federal Reserve to start tapering,” said Toshiya Yamauchi, chief manager for foreign-exchange margin trading at Ueda Harlow in Tokyo. “There’s still scope for more increases in net yen shorts.”
Leveraged funds increased net yen shorts to 48,510 contracts in week through March 30, the most since January 2019, CFTC data show. They were net long as recently as Feb. 16. Asset managers have also trimmed long positions.
The yen traded at 110.61 per dollar at 11 a.m. in London Monday after touching 110.97 last week. The currency’s decline has mirrored a selloff in Treasuries, with U.S. 10-year yields jumping around 80 basis points this year.
Beyond 112
The yen is likely to fall another 3% to 4% against a basket of G-10 currencies, according to Australia & New Zealand Banking Group Ltd. RBC Capital Markets predicts climbing U.S. yields may prove “toxic” for the currency and may push it through the 112 level, a view shared by Mizuho Securities Co.
“Speculators are boosting yen short positions as the stock-market rally drives risk-on sentiment,” said Shinsuke Kajita, chief strategist at Resona Holdings Inc. in Tokyo. “They’re also reflecting the prospect of the U.S. starting to price in rate increases at some point while the Bank of Japan last month showed more emphasis for easing.”
Not everyone is bearish on the yen.
Japan’s currency will bounce back to 108 per dollar over the next three months before strengthening to 103 over a one-year horizon, Goldman Sachs Group Inc. said in a note published Friday. The yen will see some near-term upside as the market digests U.S. President Joe Biden’s infrastructure proposal, according to Office Fukaya Consulting.
Read More: Goldman Axes Short Dollar Call as Higher U.S. Yields Spoil Bet
The yen has become “quite oversold and under-loved, so it’s getting ripe for a bounce,” said Matt Maley, chief market strategist at Miller Tabak + Co. “With hedge funds short positions so large, there’s a risk that they’ll get squeezed.”
The yen’s decline is coinciding with the euro’s.
Hedge funds extended net shorts on the common currency to the most since July as the eurozone struggles with slow vaccination rollouts and renewed lockdowns.
“With France going back into lockdown and Italy and Germany extending partial lockdowns, the weak eurozone outlook is carrying over into Q2,” Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note. The euro “is still on track to test the November low near $1.1605,” he said.
(Adds comments from Goldman Sachs in 10th paragraph)
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