- Japan intervened for the second time last week to support the falling Yen.
- Speculators are betting on more yen weakness despite recent interventions.
- Japan faces a huge challenge as speculative short Yen positions continue increasing.
Japanese yen (6J) futures prices have fallen as the flood of speculative bets against the Yen continued despite Japan’s historic FX market intervention on September 22. This led to a new 32-year low and a second round of intervention last week.
Hedge funds and speculators, however, are unlikely to be discouraged by the Bank of Japan and Ministry of Finance from betting on more Yen weakness in the face of a widening US-Japanese interest rate and bond yield gap. A third alleged BOJ/MOF intervention in early Asian trading on Monday highlights Japan’s uphill battle to protect its currency.
According to the most recent data from the Commodity Futures Trading Commission (CFTC), funds upped their net short yen position to roughly 95,000 contracts, which is the biggest wager against the currency since early June. It is a bet that is almost $8 billion in value.
Net shorts increased by more than 17,000 contracts from the previous week, the most bearish change in the previous five weeks. Notably, it was driven mainly by new short positions rather than long positions being reduced.
Japanese regulators who want to stifle speculation and “excessive” volatility would welcome the possibility that the most recent rounds of intervention could flush out some short positions.
However, examining the CFTC’s position changes in the wake of the intervention on September 22 – Japan’s first official currency purchases in 24 years – and subsequent changes in the Yen’s exchange rate is telling.
The CFTC speculators reduced their short yen positions by about 11,000 contracts the following week. That was one of the five largest decreases this year and the largest decrease in the previous seven weeks. But because funds also significantly cut their long yen position, they could not lower the net speculative wager.
Following the intervention on September 22, funds ultimately reduced their net short yen position by just a few thousand contracts. The most recent CFTC data showed they felt confident enough to increase their short yen position sizes. The more Japan intervenes, the less impact they have. Yen futures prices may likely see further declines in the coming weeks.