Written by Summer Chen
HONG KONG (Reuters) – Global hedge funds have largely pulled back from their bearish bets on the Japanese yen during the currency’s strong rally against the U.S. dollar over the past two weeks, according to a note to clients by UBS seen by Reuters on Tuesday.
Hedge funds have covered almost all of their short yen positions built over the past year, UBS said in a note on Monday, as the yen has risen about 5% against the U.S. dollar since July 10, citing inward foreign exchange flow data without disclosing the figures.
A possible $40 billion intervention by Japanese authorities has pushed the yen to about 153 yen to the dollar from about 162 yen to the dollar in mid-July.
“I think the BOJ’s goal is to convince investors not to bet against them and push the market to reduce the carry trade,” said Chui Chang, head of hedge fund Pinpoint Asset Management.
The yen’s reversal also disrupted a popular carry trade, where an investor borrows in a currency with a low interest rate and invests in a currency with a higher return.
The yen was the most popular funding currency as Japan has the lowest interest rate among G10 currencies. Analysts said investors should look for alternatives now that the yen has become so volatile.
The Bank of Japan kicked off a two-day monetary policy meeting that ends on Wednesday. Market participants have been cautious this week as they await upcoming interest rate decisions and details of its plan to gradually wind down its massive purchases of government bonds.
But not everyone is convinced by the Bank of Japan’s intervention, and views on the yen’s future direction are increasingly divergent.
In contrast to the hedge fund pullback, the real money community, or traditional long asset managers, have used “the recent yen rally as an opportunity to continue selling the currency,” UBS said in the same note.