Yen Could be In for a Setback

Above: File image of Kazuo Ueda, Governor at the Bank of Japan. © Sérgio Garcia/Your Image for ECB.

Investors are now bullish on the Yen's prospects, and this leaves it vulnerable to a potential pullback.

This is according to a new note from HSBC, which views upcoming commentary from Bank of Japan (BoJ) governor Ueda as a potential short-term risk.

"We expect the JPY to remain volatile for now. Governor Ueda is scheduled to testify at the Parliament session on Friday discussing the July 31 rate hike, and any dovish cues could stand to work against the JPY," says Joey Chew, Head of Asia FX Research at HSBC.

Expectations for further interest rate hikes from the Bank of Japan will tested by any dovish commentary, potentially weighing on JPY.

Chew notes deputy BoJ Governor Uchida Shinichi had recently mentioned that the central bank would not raise interest rates in the near term.

The JPY strengthened more than 1% in the overnight session while yields on the front-end Japanese Government Bonds rose higher as investors remained focused on the BoJ’s shrinking monetary policy divergence against the Fed amid rising expectations of a soft landing in the U.S.

CFTC data - which is the marquee gauge of foreign exchange market positioning - shows speculators have turned net long in JPY futures for the first time since early 2021.

"While the shift in positioning is helping bring USD-JPY closer to the levels implied by the yield differentials, we expect the JPY to remain volatile for now," says Chew.

The Yen was the market's favourite 'short' for much of 2024 as investors piled into bets against the currency. The washout of these bets resulted in a significant surge in JPY value.

With the market better balanced, the prospect of the rally in JPY extending diminishes and leaves it prone to setbacks.