A divergence is emerging among hedge funds in their positions in the yen, in preparation for meetings of the US Federal Reserve and the Bank of Japan, which determine the currency’s short-term exchange rate performance.
The yen’s dramatic start this week, which saw it briefly breach the closely watched ¥140 per dollar mark, has investors thinking. Some short-term funds have locked in profits ahead of this week’s monetary policy decisions, while others are looking to add to their long yen positions on bets on a big rate cut by the Fed.
“We have seen some long-term players unwind the long yen positions they had previously taken,” said Antony Foster, head of Group-of-10 spot trading at Nomura Holdings in London. “But there is still speculative interest in adding to falling dollar and cross-yen positions.”
The yen has risen more than 4% against the dollar this month amid expectations that the U.S. central bank will cut interest rates this week. The yen traded around ¥140 per dollar in Tokyo on Tuesday.
The risk for funds holding long yen positions against the dollar in the decision is that the Fed does not make a large cut, which could send the dollar rallying. Swap markets are pricing in a roughly 70% probability of a 50 basis point rate cut by the Fed on Wednesday.
“The dollar and dollar spot index are under pressure as market prices have reached extreme levels,” said Martin Whetton, head of financial markets strategy at Westpac Banking in Sydney. “The risk in the short term is that the market experiences some sort of disappointment, which could lead to unwinding of positions across asset classes.”
