Hedge funds are increasingly bullish on the Japanese yen, with many predicting it will strengthen beyond 150 per dollar by the end of 2026. This sentiment is largely fueled by expectations of aggressive interest rate hikes from the Bank of Japan (BOJ) in the near future. The yen has already seen a significant rally, gaining 4.5% in a week and reaching a near seven-month peak. This surge is upending the long-established carry trade, a strategy where investors borrow in low-interest currencies like the yen to invest in higher-yielding assets.
The yen's recent upward trajectory, which included breaking through the 155 per dollar level, has triggered stop-loss orders and put the 152 area firmly in traders' sights. The currency strengthened as much as 0.4% to 153.80 on a Tuesday, making it the best performer among Group-of-10 currencies this month with gains of almost 4%. This rally is attributed to early signs of capital repatriation, the anticipated faster pace of monetary tightening by the BOJ, and even pressure from the United States. The yen had hit 40-year lows in July, prompting a joint U.S.-Japan intervention.
The unwind of popular carry trades is a significant factor in the yen's appreciation. A rush to close out yen-funded carry trades helped the currency reach a one-month high against the dollar, nearing levels last seen in May following Ministry of Finance intervention. JPMorgan Chase & Co. strategists noted that a further unwinding of sizable short positions, estimated at $103 billion, could accelerate the yen's gains if it strengthens past 155 per dollar. They cautioned that if the dollar-yen pair breaks below 155, selling could beget further selling, driving a larger-than-expected yen appreciation. The yen has now risen to its highest level since February, surpassing the peak reached after the coordinated intervention by Japan and the US.
