Source: Broker China Author: Zhou Le

Currently, the extent to which the yen has experienced shorting is comparable to that on the eve of the financial crisis. According to the latest data released by the US Commodity Futures Trading Commission, in the week ending April 2, the net amount of short yen held by global hedge funds and asset management companies rose to 148,388 shares, the highest level since January 2007.

Reacting to the market level, the yen is facing tremendous depreciation pressure. The exchange rate of the US dollar against the yen is approaching its lowest point in 34 years, and is also close to a possible intervention line of 152 by the Japanese Ministry of Finance.

The sharp fall in the yen is probably a typical “microcosm” of the current global exchange rate market. Recently, other non-US currencies, such as the Korean won, Swiss franc, and Indonesian rupiah, have also faced significant depreciation pressure. Analysts pointed out that the main reason behind this may be the continued strengthening of the US dollar and the sharp fall in expectations of the Federal Reserve's interest rate cut.

Shorting the yen

According to the latest data released by the US Commodity Futures Trading Commission, in the week ending April 2, the net amount of short yen held by global hedge funds and asset management companies rose to 148,388 shares, the highest level since January 2007.

Regarding the huge shortfall, analysts pointed out that in view of the widening interest rate gap between Japan and the US, there is still room for the yen to weaken further.

Marito Ueda, head of SBI Liquidity's market research department, said that economic indicators and even statements from Bank of Japan officials are not enough to make them buyers of yen, and more yen sell-offs may occur, but this is likely to clash with the timing of the intervention of the Japanese monetary authorities.

This shows that the Bank of Japan's first interest rate hike in 17 years has hardly changed the foreign exchange market pattern dominated by the Federal Reserve.

With international capital shorting, the yen is approaching a 34-year low, and is already close to Japan's Ministry of Finance's possible intervention line of 152.

Regarding the recent depreciation of the yen, Japanese officials warn about speculation in the foreign exchange market almost every day.

Currently, market predictions for the Bank of Japan's further entry into the market are heating up. Analysts generally believe that before the Federal Reserve starts cutting interest rates, it may be difficult for the Bank of Japan to completely reverse the yen's decline by relying only on “verbal intervention+entry intervention”.

On April 8, Takehiko Nakao, a former financial officer at Japan's Ministry of Finance, said that if the yen fluctuates too much and requires intervention, the authorities may interfere in the foreign exchange market at any time. He pointed out that if the level of yen and its basic trend were to be viewed from signs of speculation, he would not be surprised that the authorities would intervene at any time.

The US CPI inflation data to be released this week may also further indicate that the Federal Reserve does not need to rush to cut interest rates and push up the volatility of the yen.

Thanos Vamvakidis, the global head of monetary strategy at Bank of America, said that the Bank of Japan is expected to intervene when the USD/JPY exchange rate is 152. If the Fed does not cut interest rates, the maximum USD/JPY will rise to 160; if the Fed cuts interest rates, the dollar may fall to 142 against the yen.

Pressure from the Bank of Japan

The latest signals released by the Japanese economy may also be one of the reasons why the market is shorting the yen.

On April 8, the February monthly labor statistics survey (initial value, units with 5 or more employees) released by Japan's Ministry of Health, Labor, and Welfare showed that actual wages, taking into account price changes, decreased by 1.3% compared to the same period last year. The decline was greater than last month, and the year-on-year decline was 23 consecutive months.

At a time when real wages were falling, CPI accelerated to 2.8% in February, the fastest growth rate since November last year. This outcome may put the Bank of Japan on hold on hold for a while.

Daiwa Securities economist Kota Suzuki said that if actual wages become positive, it will be easier for the Bank of Japan to act.

Kota Suzuki predicts that real wage growth will turn positive by the middle of this year. At that time, large wage increases brought about by wage negotiations will be reflected in the number of employed people, and inflation will slow down.

Furthermore, according to a report released on the 8th by the Tokyo Commerce and Industry Research Institute, a Japanese private enterprise reputation investigation agency, the number of bankrupt companies in Japan increased dramatically in fiscal year 2023 (April 2023 to March 2024) as preferential loans issued by the government expired one after another during the COVID-19 pandemic and the financial situation of some companies deteriorated. According to the report, the number of bankrupt companies in Japan with debts exceeding 10 million yen (1 US dollar is about 152 yen) increased by 31.58% year-on-year to 9053, and the total debt of bankrupt companies exceeded 2.46 trillion yen.

US dollar counterattacks

The sharp fall in the yen is probably a “microcosm” of the current global exchange rate market.

Recently, G10 non-US currencies such as the Korean won and Swiss franc have continued to depreciate. Among them, the exchange rate between the US dollar and the Korean won rose to 1356.84 on April 8; the US dollar rose to 0.9065 against the Swiss franc.

According to data from the US Commodity Futures Trading Commission, speculators' bets on a stronger dollar have peaked, especially against G10 currencies, particularly the Japanese yen and the Swiss franc.

Among them, the situation of the Swiss franc is similar to that of the yen. The current net short position has also reached the highest level in the past five years, showing that the market is bearish on the Swiss franc.

Investors' net long positions against the US dollar have reached a high level, which reflects strong confidence in the strengthening of the US dollar. Reacting to the market level, the US dollar index has continued to strengthen since 2024. Up to now, the cumulative increase during the year has reached 3%.

In the face of a strong counterattack by the US dollar, some central banks have already begun to take action.

Among them, Turkey announced on March 21 this year that it will raise the benchmark interest rate again by 500 basis points to 50%. This is the first time that the Central Bank of Turkey has raised interest rates again since announcing the end of the interest rate hike cycle in January.

Indonesia, on the other hand, directly interfered in the interbank, forward, and bond markets to stabilize its currency; Swedish officials said that the devaluation of the krona may delay its first easing measures.

Behind the unexpected strengthening of the US dollar is the market's repricing of expectations for the Federal Reserve to cut interest rates in 2024.

The newly released US non-farm payrolls data for March greatly exceeded expectations, causing expectations of the Federal Reserve's interest rate cut to plummet in June, and kept the US dollar index above the 104 mark.

Matt Simpson (Matt Simpson), a senior analyst at Jiasheng Group, said that if the Federal Reserve were really data-driven, it would be very difficult to cut interest rates. The market is now fully priced and the first rate cut will take place in September rather than July of this year.

In fact, a series of US economic data since 2024 have exceeded expectations, including higher than expected inflation data for January and February, and stronger than expected ISM manufacturing data for March, which makes the market more inclined to think that the Fed's interest rate cut this year is no longer necessary.

At the same time, many Federal Reserve officials continue to release “hawkish” signals, causing more and more Wall Street economists in China to begin to anticipate that they will probably not see any interest rate cuts within this year.

Ed Yardeni, president and chief investment strategist at investment company Yardney Research, pointed out in the report that the market may have begun betting on the possibility that the Fed will not cut interest rates this year.

edit/lambor