Yen Rebound Accelerates as Rate Hike Bets Converge with Capital Flows
The Japanese yen has started to recover from its four-decade low against the US dollar, which it fell to six weeks ago. A crowded trade is becoming vulnerable as policy signals, capital flows, and rising bond yields converge around Japan's currency.
Capital returns to Japan, carry trades are unwinding, and political pressure from the US is mounting, prompting traders who have bet against the yen for years to reassess their strategies. Investors are becoming less willing to aggressively build short positions in the Japanese currency, particularly with a possible Bank of Japan rate hike in September adding new risk.
The market expects the Bank of Japan to raise its key interest rate by 25 basis points this month, and some investors are considering a 50-basis-point hike or rapid moves in coming months. According to Citigroup, yen positions shifted from bearish to bullish at the beginning of August, with interbank flows showing that leveraged funds, banks, and real-money investors were net buyers of the yen this week.
The combination of shifts in central-bank policy, investment-capital flows, and changes in speculative positions is amplifying volatility. The yen could rise 2.3% against the dollar this week, its best performance since a rare joint currency intervention by the US and Japan at the end of July.