By Summer Zhen
HONG KONG (Reuters) – In a surprising turn of events, global hedge funds have made a significant retreat from their bearish bets on the Japanese yen amid the currency’s strong rise against the U.S. dollar over the past two weeks, according to a UBS note to clients seen by Reuters on Tuesday.
Hedge funds have covered nearly all of the short yen positions they had built up over the last year, as the yen rallied by approximately 5% against the U.S. dollar since July 10, UBS revealed in a note on Monday. This shift in sentiment comes after a suspected $40 billion intervention by Japanese authorities, which has propelled the yen to around 153 per dollar from approximately 162 per dollar in mid-July.
“I think the Bank of Japan’s goal is to convince investors not to bet against them and to push the market to deleverage the carry trade,” said Zhiwei Zhang, president at hedge fund Pinpoint Asset Management.
The reversal in the yen’s trend has also disrupted popular carry trades, where investors borrow in a currency with low interest rates and invest in a higher-yielding currency. With the yen being the most popular funding currency due to Japan’s low interest rates, analysts are now advising investors to seek alternatives as the yen has become too volatile.
Japan’s central bank has started a two-day policy meeting that will conclude on Wednesday. Market traders are exercising caution as they await upcoming interest rate decisions and details of the bank’s plan to gradually retreat from its massive purchases of government bonds.
While hedge funds have pulled back from their bearish positions, the real money community, or traditional long-only asset managers, have used “the recent yen rally as an opportunity to keep selling the currency,” UBS noted in the same report.
Analysis
The shift in sentiment among global hedge funds regarding the Japanese yen could have significant implications for the currency’s future direction and the broader financial markets. As hedge funds cover their short positions and traditional asset managers continue to sell the yen, we may see increased volatility in the currency as investors reassess their strategies and seek alternative funding currencies.
Investors should closely monitor the Bank of Japan’s policy decisions and any further interventions in the currency markets to gauge the potential impact on their portfolios. The yen’s recent rally against the U.S. dollar serves as a reminder of the dynamic nature of the forex market and the importance of staying informed and adaptable in response to changing market conditions.