[Foreign Exchange] How far will hedge funds sell the yen? | Yoshida Tsune's Forex Daily | Moneyクリ Monex Securities' investment information and media helpful for money.

Position for buying yen reduced by 35% from the peak = still a significant buying of yen

The speculative long position in yen (short position in US dollars) reflected in the CFTC (Commodity Futures Trading Commission) statistics for hedge funds has decreased from the peak of 179,000 contracts recorded at the beginning of May to 116,000 contracts as of July 8, representing a reduction of approximately 35% (see Chart 1).

[Figure 1] CFTC statistics on speculative yen Position (From January 2022) Source: Created by Monex Securities from Refinitiv data. Despite this significant reduction, considering that the highest net buying of yen until 2024 was recorded at 70,000 contracts in 2016, it remains unchanged that the situation is still a record high net buying, and it can be said that the yen is still "overbought" (see Chart 2). So, will the selling of yen accompanying this yen "overbought" correction continue further? This seems to hold a key to considering the possibility of further yen depreciation in the future.

[Figure 2] CFTC statistics on speculative yen Position (2005 onwards) Source: Created by Monex Securities from Refinitiv data

Yen "Overbought" Correction, Could Significantly Influence Future Yen Depreciation

It is a common trend for positions that are significantly tilted in one direction to shrink as summer approaches, likely influenced by the movement towards position adjustments before the summer vacation. Typically, such a reduction in positions would continue through August. In that sense, the recent correction of the yen being "overbought" may still have the potential to continue into August.

Another focus is the relationship with the breakeven point. If the yen buy Position is in unrealized profit, there is basically no need to rush its disposal. However, if it falls into unrealized loss and there are concerns that the loss may expand further, the disposal of the Position may accelerate.

It was seen that it actually happened just one year ago, in July 2024. At that time, unlike recently, the yen was in an "oversold" situation, but when it fell below the 120-day MA (moving average), which was seen as the breakeven point, there was a rapid expansion of yen buying back, which was seen as the liquidation of yen selling positions. This was likely due to the spread of the movement to sell US dollars (buy back yen) while the prices were still high before the losses on US dollar buying and yen selling positions expanded.

Conversely, it is seen that the position has significantly tilted towards selling US dollars and buying yen, unlike a year ago. The breakeven point, the 120-day moving average, is exactly 147 yen as of July 11, so the yen-buying position may have begun to incur losses (see Chart 3). If further yen depreciation causes the losses on the yen-buying position to expand, the increase in yen selling due to the liquidation of positions should be closely monitored.

[Figure 3] USD/JPY and 120-day MA (January 2022 - ) Source: Created by Monex Securities from Refinitiv data

Another focus is the relationship with U.S. monetary policy.

However, the recent record expansion of yen buying was unreasonable in relation to the interest rate differential. Although the interest rate differential between Japan and the United States (with the US dollar being more favorable and the yen being less favorable) has narrowed compared to before, the absolute situation of a significantly unfavorable yen continues. In this context, the record expansion of yen buying, which is disadvantageous according to the interest rate differential, occurred. It is possible that the currency policy of the Trump administration, which called for a stronger yen, had a strong influence on this (see Chart 4).

[Figure 4] CFTC statistics on speculative yen positions and the interest rate differential between Japan and the United States (2005–) Source: Created by Monex Securities from data provided by Refinitiv. When overlaying the positions of speculative players against the USD/JPY, it becomes clear that starting from the time of the Trump administration, there was a significant shift where, while being cautious about selling yen even in a weak yen environment, they began to actively lead yen appreciation through aggressive yen buying (see Figure 5).

[Figure 5] CFTC statistics on speculative yen Position and USD/JPY (May 2024 onwards) Source: Created by Monex Securities from Refinitiv data If there is no change in the strong linkage between hedge funds and the currency policy of the Trump administration, it is believed that the position trends of hedge funds will continue to reflect the currency policy of the Trump administration. Specifically, if U.S. currency policy does not allow for a weaker yen, hedge funds may be inclined to restrain the selling of yen associated with their disposal, despite concerns about the expansion of losses in their yen-buying positions.

Instead, if Hedge F moves to expand yen selling, we need to pay attention to the possibility that either the coordination with U.S. monetary policy has changed, or that U.S. monetary policy itself is tactically changing its stance towards Japan in relation to tariff negotiations.