Hedge funds turn bullish on the yen for the first time in 14 monthsis a reversal signal emerging for carry trades?

Title context: Hedge funds turn bullish on the yen for the first time in 14 monthsis a reversal signal emerging for carry trades? Text: Data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday showed that hedge funds liquidated their short bets against the yen in the week ended September 15 and began building long positions for a stronger yenthe first time since July 2025 that leveraged funds have collectively turned bullish on the yen, and a notable shift in sentiment weeks after U.S. and Japanese authorities jointly intervened in the currency market. These funds currently hold long yen positions worth about 251 billion yen ($1.6 billion). The same CFTC data also showed that as of September 15, speculative traders, including asset managers and non-commercial participants, had collectively cut their bullish dollar bets to the lowest level since Marcheven as the dollar this week posted its largest weekly gain in three months. A sentiment turn after intervention The shift to bullish yen positioning came after U.S. and Japanese authorities jointly bought yen from late July to late August. This summer, the yen weakened to around 164, its weakest since 1986, and on August 3, Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Bessent jointly confirmed the intervention; according to Japan's Ministry of Finance, authorities used 15.4 trillion yen (about $96.4 billion) to support the yen between July 30 and August 26, a record for a single month, with the operations on July 30 and 31 marking the first joint U.S.-Japan intervention since 1998. Even so, the yen fell below 160 again on August 31. On Friday, it traded at 156.88 in late New York trading. Another backdrop to this turn is the historic buildup of yen shorts. According to Jefferies' analysis of Bank for International Settlements (BIS) data, cross-border yen borrowinga proxy for carry tradeshad surged to a record 360 trillion yen ($2.35 trillion) as of March this year. Charu Chanana, chief investment strategist at Saxo Bank, previously warned that such positions are "fragile," and further yen strength could turn a gradual deleveraging into a faster, self-reinforcing unwind. The timing of hedge funds' shift to bullish yen positioning came just before this week's central bank meetingsand what followed quickly created problems for the new positions. Central bank week: rate hikes delivered, signals dovish The Federal Reserve raised rates by 25 basis points this week, lifting the target range for the federal funds rate to 3.75%-4.00%. The Bank of Japan then raised its policy rate from 1.0% to 1.25%, a 31-year high, just three months after its June hikethe shortest interval between hikes since 1990. The decision passed 7-2, with two members newly appointed by the Takaichi Sanae government voting against it; Governor Kazuo Ueda said at a press conference that Japanese monetary policy "has entered a new phase," and when asked whether rates could be raised by more than 25 basis points at once, said "depending on price developments, various possibilities exist," but did not clearly hint at another hike in October. Surveys show the market broadly expects the policy rate to rise to 1.5% by the end of March 2027 and further to 1.75% in the second quarter. As the original text states, the BOJ's signals disappointed some market participants who had hoped for a clearer path of consecutive rate hikes, and also left traders who had just turned bullish facing the risk of being "checkmated." Strategists are clearly divided on the yen's near-term direction. Wells Fargo strategist Chidu Narayanan believes the bar for the BOJ to meet or exceed hawkish market expectations is very high and recommends shorting the yen; ING G10 FX strategy head Chris Turner previously estimated that if the BOJ does not signal further rate hikes, the yen would weaken to 157-158 against the dollar. State Street Asia-Pacific macro strategy head Choi Ji-wook is bullish, expecting the BOJ to continue hiking in December and next March, with a terminal rate of 1.75%, and a three-month USD/JPY target of 152.5 yen. V-shaped reversal and intervention alert During Friday's New York session, the yen at one point fell 1.3% against the dollar. USD/JPY briefly broke above 158 during European trading, a two-week high; then reports emerged that the Bank of Japan had conducted a "rate check" with market participantsa move typically seen as a precursor to official intervention. After that, the yen rose by more than 1 yen against the dollar within about an hour, with USD/JPY falling from around 158 to the upper 156 range, trading near 156.80 in late New York. Institutions interpreted the rate check fairly consistently. Bank of America FX strategist Alex Cohen told Wallstreetcn that the yen still depreciated sharply after the BOJ rate hike, and "today's rate check is another warning to the market," with Japan's Ministry of Finance having shown a willingness to use large amounts of foreign reserves for intervention. Analysis noted that such a move would make traders think twice about chasing yen weakness, "especially with the exchange rate near 160." In addition, Japan is about to enter a holiday period, and lower trading volume could further amplify the impact of official action on the exchange rate, making the current time window particularly sensitive for the market. The CFTC positioning data is precisely a window for investors to observe this $9.5 trillion-a-day foreign exchange market and track hedge funds' and asset managers' derivatives positions. Carry trades: will there be another reversal this time? All discussion about yen positioning ultimately comes down to the same questionwhether carry trades will see another concentrated unwind. The reference point is August 2024: at that time, a BOJ rate hike combined with weaker U.S. employment data caused a sharp yen surge that triggered a chain reaction of carry-trade covering, sending global risk assets into violent swings. According to CICC estimates, hedge funds' net short yen positions had rebounded to about 110,000 contracts on September 2, then fell to about 50,000 contracts by September 9, more than halving from the high. On that basis, CICC judged that the overall scale of carry trades has already shrunk markedly, and "the possibility of a reversal is relatively limited." But the foundation supporting carry trades has not disappeared. There is still an absolute interest rate differential of 250 to 275 basis points between U.S. and Japanese benchmark rates. As long as the policy stances of the two central banks do not change substantially, the basis for yen "carry trades" will continue to exist, and international financial markets may still look again for opportunities to short the yen. The analysis also warned that if the yen enters a collapse-like decline, it would push up Japanese government bond yields, force carry trades to unwind, and directly hit the U.S. Treasury and U.S. equity marketswhich also explains why U.S. and Japanese authorities have limited tolerance for disorderly exchange-rate moves. The longer-term impact is structural. As Japan's policy rate and government bond yields continue to rise, the yen's cost advantage as a funding currency will gradually decline, and the incentive for Japanese insurers, pension funds, and banks to keep increasing allocations to overseas assets may weakenthe result is more likely to be a marginal contraction in yen funding and a slowdown in new overseas allocations, which in turn would marginally raise global funding costs and the long-term interest rate center. Funds are already flowing back: as of August 22, Japanese investors had net sold about 3 trillion yen of overseas bonds this year, the largest for the same period since 2022; separately, according to a JPMorgan survey of 82 Japanese corporate pension funds, the net share planning to increase holdings of domestic bonds is the highest since 2008.