Hedge Funds Were Most Bearish on Yen Since August Before US Vote

Mia Glass and Ruth Carson
·2-min read

(Bloomberg) -- Hedge funds turned the most negative on the yen since August in the run up to the US presidential election last week, suggesting many were positioned for a Donald Trump victory.

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Speculative investors boosted their yen shorts for a fourth week through Nov. 5, based on Commodity Futures Trading Commission data, the day of the polls that led to the former president winning a comprehensive victory. The yen slumped versus the dollar as the results emerged Wednesday, before reversing direction the following day to end the week marginally stronger.

The so-called Trump trade, which includes a stronger dollar among other strategies, is predicated on the president-elect’s pledges to cut taxes and raise tariffs, potentially driving up inflation and Treasury yields. Betting on the yen proved less than straightforward though as the currency bounced back from its post-election selloff as the dollar fell and the Japanese authorities warned they would prevent excessive moves.

“I see this as more of a dollar-strengthening story, as we were seeing the Trump trade coming to the fore,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo.

Omori said traders may return to putting on yen carry trades, which involve borrowing in the relatively low-yielding Japanese currency to fund investments in higher-yielding alternatives.

‘We are tilted towards the direction of an increase in yen carry trades despite the chances of a December or January hike from the Bank of Japan being high,” he said.

Others say the direction of the dollar-yen pair is likely to return to being driven by the difference between short-term bond yields between the two countries. Any dialing back of policy easing expectations for the Federal Reserve is likely to bolster the dollar, weighing on everything from the yen to emerging-market currencies such as the Mexican peso.

“Fed expectations are wrong,” Torsten Slok, chief economist at Apollo Global Management in New York, wrote in a research note. “The economy is strong and there are upside risks to inflation. Markets are pricing in too many Fed cuts.”

The most immediate data point likely to impact the dollar-yen though is Wednesday’s US inflation reading for October that will influence the Fed’s rate path. The US consumer price index probably rose to 2.6% last month, from 2.4% in September, based on a Bloomberg survey.

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