Hedge Funds Slash Yen Short Positions as Year-End Risks Pile Up

21 Dec 2021, 03:43 AM IST

(Bloomberg) -- Hedge funds have become the least negative on the yen in nine months as jitters over rising U.S. interest rates and the spread of omicron revive demand for the haven currency.

Leveraged investors cut bearish positions on the yen for a sixth week to a net 23,031 contracts in the period through Dec. 14, the least since March, according to data from the Commodity Futures Trading Commission. The move coincided with last week’s hawkish Federal Reserve meeting and tighter global movement restrictions to counter the latest Covid strain.

“The yen has got some pretty cheap valuations and when you think about the risk of outbreaks getting worse with the omicron, a stronger yen makes sense,” said Kerry Craig, a global market strategist at JPMorgan Asset Management in Melbourne. “If we continue to see more risk-off action, it’d make sense to see the yen benefiting even more into the year-end.’

Hedge Funds Slash Yen Short Positions as Year-End Risks Pile Up

The yen is the best-performing Group-of-10 currency since the end of October, appreciating 0.3 versus the dollar, as the prospect of higher Fed rates and the spread of omicron threaten to derail the global recovery. The currency appreciated against all its major peers Monday after a new round of movement lockdowns were imposed from Edinburgh to California.

Despite its recent gains, the yen is still down about 9% against the dollar this year, having weakened through the early part of 2021 amid optimism over global growth and the divergence in policy between the hawkish Fed and the dovish Bank of Japan.

Worries around year-end liquidity may just be giving the yen a temporary boost, according to Sumitomo Mitsui DS Asset Management Co.

“Currency markets become highly volatile around this time of year, as seen particularly in 2018 when hedge funds had accumulated quite a large yen net short positions but then got squeezed when the yen surged toward year-end,” said Kei Yamazaki, a senior fund manager at Sumitomo Mitsui DS Asset in Tokyo. “After the year-end holidays, net yen short positions are likely to resume.”