Tokyo: Jiji Press— Yen carry bets in the global monetary market have been quickly undone as the Japanese yen gained by around ¥20 per U.S. dollar over the last month, following a notable devaluation to a 37-year low.
Key indication of speculative yen carry transactions is the net short position in yen futures, particularly in the non-commercial sector on the Chicago Mercantile Exchange. Recent weeks showed a sharp drop in these positions. The net short position peaked at 184,000 futures on July 2, then dropped drastically to 73,000 contracts by July 30, and further down to only 11,000 contracts as of Tuesday, according to data from the U.S. Commodity Futures Trading Commission.
At ¥161.94 per dollar, the Japanese yen sank to its lowest level in over four decades earlier in July. But by August 5, the yen had recovered to ¥141.69 after the Bank of Japan decided to increase its policy interest rate on July 31.
Yen carry trading involves borrowing low-interest yen and selling it to pay for higher-yielding foreign currencies. It is thought that a change in market expectations on interest rates in both Japan and the United States set off an abrupt reversal of these holdings.
Early July’s high inflationary pressures in the United States sapped expectations for a Federal Reserve interest rate drop shortly ahead. But the publication of the August 2 employment data by the U.S. government raised questions over a probable economic downturn, which made investors expect a likely rate reduction in September.
By contrast, the Bank of Japan has changed its monetary policy posture. After the July 31 increase, BOJ Governor Kazuo Ueda made hints about the likelihood of another rate rise later this year. This shift has helped to explain the quick collapse of too large yen short bets.
Reflecting on the current market swings, Shota Ryu, a currency analyst at Mitsubishi UFJ Morgan Stanley Securities Co., said, “Excessive yen short positions have been unwound.”
Some observers believe the pattern cannot last indefinitely, even with the yen surge. “The interest rate gap between Japan and the United States is still wide,” stated Shinichiro Kadota, director of currency and bond research at Barclays Securities Japan LTD., “so yen carry trade could revive once market fears ease.”
After BOJ Deputy Governor Shinichi Uchida said in a speech on Wednesday that the central bank would not increase interest rates in times of financial market uncertainty, the upward momentum of the yen seemed to have stopped slightly.
The future path of yen carry trades and more general currency market trends will probably be influenced by the careful observation of both local and foreign economic data as the rally of the yen steadies.
