Speculators slash bets against yen as BoJ leaves carry traders gasping

The yen looks to be losing its appeal as the currency of choice to fund so-called carry trades, with speculators cutting bearish bets on it to the lowest level in nearly four months in the wake of this week’s shock move by the Bank of Japan (BoJ).
Leveraged funds cut their net-short position on the yen by 8,274 contracts to 13,207, the lowest level since the end of August, according to data from the Commodity Futures Trading Commission for the week through Tuesday. That was the day that the BoJ rocked markets with its decision to loosen the parameters of its yield-control policy, sending the currency soaring by close to 5% on the day at one stage.
The yen has lost some ground since then, but late on Friday was still 2.8% stronger than it was a week earlier. And some analysts predict it may strengthen further as the central bank eventually edges away from its policy of near-zero borrowing costs.
While most major central banks have moved to lift borrowing costs aggressively this year to tame inflation, the BoJ has been a laggard, keeping its key benchmark below zero.
On Tuesday, policy makers announced they were doubling to 0.5% the level to which it will allow 10-year bond yields to go as it seeks to keep that rate in a band around zero. That’s not, of course, an abandonment of its ultralow interest-rate policy, but many see it as a sign that it will need to shift in that direction.
The dovishness that the BoJ exhibited up until this week has fuelled weakness in the currency — with carry trades being a key mechanism for that — and so signs of a hawkish turn have the potential to reverse that, at least to some extent.
“The trade was definitely a carry trade,” said Brent Donnelly of Spectra FX Solutions. “It’s shocking to me that the market is still short yen.” The basic mechanics of a carry trade involve borrowing funds in a currency where interest rates are lower, for example Japan’s, and then lending those same funds in a currency with higher rates, oftentimes in emerging markets.
That can be profitable so long as a rate differential persists and there isn’t a significant shift in the underlying value of the currencies, which if big enough can wipe out the gains made from the lending-cost differential.
Volatile markets are the enemy of successful carry trades. The yen has been, until recently, one of the currencies favoured by investors to fund these sorts of trades, and that’s helped to weigh on it. Earlier this year the yen weakened past the key psychological level of 150 per dollar for the first time since 1990 and the Japanese government became concerned enough about it to intervene directly in the market by selling dollars.
The currency is now a far cry from that level. On Tuesday it strengthened to 130.58 per greenback, a level last seen in August, and ended the week around 132.91.
The data from the CFTC, which are used by many observers to help assess how currency traders are positioned, point to a marked scaling back of bets against the yen by speculative funds.
Yet the position does still remain short on a net basis. At the same time, positioning on the euro, which also offers relatively low yields compared to the dollar, has seen an increase in bets against it.
“People are now using the euro and British pound to fund stuff, moving away from the yen,” said Spectra’s Donnelly. “It’s getting harder to find good funders though, as everyone is hiking pretty quick.”