Source: Caixin.
Author: Liu Rui.

Amidst suspicion that Japanese authorities have taken intervention measures to boost the yen, hedge funds have significantly reduced their bearish bets against the yen, with the reduction scale reaching a new high in the past 13 years.

However, forex traders face the next major test at the end of this month when both the Federal Reserve and Bank of Japan will make policy decisions.

Massive reduction of short yen positions.

According to data from the US Commodity Futures Trading Commission (CFTC), leveraged funds reduced their net short yen positions by 38,025 contracts in the week ending July 16, the most since March 2011. However, after the reduction, there were still 76,588 contracts for short positions.

But this change coincides with the improvement in the popularity of the yen. On Wednesday last week (July 17), the USD/JPY exchange rate rebounded to the highest level since early June. It is speculated that the Japanese authorities spent JPY 5.64 trillion (approximately USD 35.8 billion) to buy yen on two trading days of July 11 and 12, boosting the yen exchange rate from near its lowest level in 40 years to soar.

Yukio Ishiuki, senior forex market strategist at Daiwa Securities Tokyo, said: "After a series of interventions in Japan, there is not much demand for selling yen." He said that before the Bank of Japan announces its policy decision on July 31, "the trend of closing out yen short positions seems to be dominant."

In addition to the intervention by the Bank of Japan, another reason for the recent rise in the yen is the market's bearish view of the short-term trend of the US dollar. As the cooling trend of US inflation becomes apparent, the market's bet on a September rate cut by the Federal Reserve is becoming more and more firm.

In addition, speeches by politicians also affect market sentiment. Last Wednesday, Trump said in an interview, "a strong US dollar and a weak yen is a big problem." As Trump's chances of winning the US election became more apparent, his criticism of the weak yen became more and more prominent in the market.

At the same time, Taro Kono, Japan's digital minister and a leading candidate for the next prime minister, said," A rapid depreciation of the yen will push up domestic prices in Japan, and the yen is currently too cheap, and the Bank of Japan needs to raise interest rates to correspond to the depreciation of the yen."

The next major test for forex traders will be at the end of this month when both the Federal Reserve and Bank of Japan will make policy decisions. Once the Bank of Japan makes any moderate hints, it could be seen by the market as a reason to short the yen again.

With the continuous rise in consumer prices in June, the Bank of Japan has more sufficient reasons to raise interest rates again. According to Bloomberg's survey last month, about one-third of Bank of Japan watchers expect the central bank to raise interest rates at the July 31 monetary policy meeting.

Forex traders face the next major test at the end of this month when both the Federal Reserve and Bank of Japan will make policy decisions. Once the Bank of Japan makes any moderate hints, it could be seen by the market as a reason to short the yen again.

As the consumer price index in Japan continued to rise for the second consecutive month in June, the Bank of Japan has more solid reasons to raise interest rates again. According to a Bloomberg survey last month, about one-third of central bank observers believe that the Bank of Japan is likely to raise interest rates at its monetary policy meeting on July 31.

Krishna Bhimavarapu, Asia-Pacific economist at DWS Group, wrote in a report, "We expect the Bank of Japan to raise interest rates in July, which may bring some much-needed sustainability to the yen."

Editor/Jeffy