Japanese Retail Investors Elevate Bullish Yen Bets to Near Record Highs

USD/JPY

TradingKeyAug 14, 2024 7:37 AM

TradingKey - Japanese retail investors continue to bet on a further rally in the yen, despite it giving back some of its gains from the past two weeks.

As of Monday, individual traders' net long positions in the yen against 14 foreign currencies via futures totaled ¥431 billion ($2.9 billion), marking a 22% increase since the Bank of Japan's rate hike late last month. This figure, according to data from the Tokyo Financial Exchange Inc. compiled by Bloomberg, is nearing the record high of ¥501 billion set in April.

Source: Bloomberg

One of the factors driving bullish sentiment on the yen is the prospect of the Federal Reserve easing its policy. Wholesale inflation figures for July came in below expectations, providing further arguments for the Fed to consider rate cuts starting in September.

The U.S. Bureau of Labor Statistics reported on Tuesday that the Producer Price Index (PPI) increased by 0.1% in July, lower than the 0.2% gain in June and below economists' forecasts of a 0.2% rise for July. This brought the year-over-year increase in wholesale prices down to 2.2%, compared to a 2.6% increase in June.

According to the CME Group's FedWatch tool, interest rate futures indicate there is approximately a 50% chance that the Federal Reserve will cut rates by a quarter or half a percentage point at its next policy meeting scheduled for September 17-18.

Source: CME FedWatch Tool

Increased market volatility has also energized yen bulls. Takuya Kanda, Research Director at Tokyo Gaitame.com Research Institute, commented on carry trades, stating, "The theory is to sell yen and buy other currencies because of interest-rate differentials, but this is difficult to do in a situation where market stability hasn’t found a strong enough footing." Therefore, in the current environment of heightened market volatility, reduced carry trading could lead to yen appreciation.

Additionally, Kanda noted that the risk of declining stock prices often tends to boost the yen's exchange rate against other currencies.

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