Yen short bets soar to nine-year high! Arbitrage trading ignores intervention and "resurgence"

Despite facing pressure from interest rate hikes by the Bank of Japan and potential government intervention risks, speculative funds' bearish sentiment towards the yen has reached its highest level in nearly nine years. This indicates that despite the intervention risks and the possibility of a rate hike by the Bank of Japan this Tuesday, yen carry trades are still making a comeback. According to data from the U.S. Commodity Futures Trading Commission, as of the week ending June 9, leveraged funds held a net short position on the yen exceeding 115,000 contracts, the highest level since November 2017. This level far surpasses the peak before last year's intervention, showing that speculative funds continue to have a negative outlook on the yen's future. The current exchange rate of the yen is hovering around 160 yen to the dollar, making traders cautious about government intervention. Yen carry trades involve borrowing low-interest yen funds and investing them in higher-yielding assets denominated in other currencies. This strategy is active once again, partly due to the relative low volatility in global markets. Despite the gradual rate hikes by the Bank of Japan, the interest rate differential between Japan and the U.S. persists, and with the Tokyo authorities repeatedly intervening in the market on a large scale, the yen continues its downward trend. Moreover, compared to two years ago, the intervention has been "digested," and the market has mostly priced in the possibility of the Bank of Japan's rate hikes and foreign exchange intervention actions. Investors are no longer panicking. In a report, including Junya Tanase, strategists from J.P. Morgan wrote that the potential rate hikes by the Bank of Japan and the market support actions are "largely digested by the market," whereas two years ago, these were still unexpected events. They point out that many investors see the yen strength driven by intervention as a selling opportunity at highs, as evidenced by the intervention in April and May - during which the yen short positions briefly contracted before quickly rebuilding, returning to pre-intervention levels. However, yen carry trades are not without risks. In 2024, this strategy experienced a sharp reversal when the Bank of Japan hiked rates and announced a halving of its bond purchase program, causing the yen to rebound significantly. This forced investors to urgently close leveraged positions and had an impact on global forex and stock markets. This "stampede" not only severely hit yen shorts but also impacted global stock markets and other currency markets through the deleveraging chain.