"Certainty trading"? Traders collectively short the Japanese yen before the CPI announcement

As investors prepare for the U.S. CPI inflation data that may disrupt the financial markets, the call to "sell the yen" is growing louder.

The largest banks in Asia almost unanimously believe that the yen will continue to weaken as traders reduce their bets on a Fed rate cut, which supports the dollar and U.S. Treasury yields. The expectation of further yen depreciation is inspiring traders to re-establish bearish positions on one of the most easily sellable currencies amidst strong U.S. inflation data.

Nick Twidale, Chief Analyst at Sydney-based ATFX Global Markets, who has been trading the yen for 25 years, stated, "Selling the yen is the most popular trade so far, shorting the yen remains profitable for hedge funds, and given doubts about the extent of a Fed rate cut, investors are currently more inclined to short the yen."

The yen is the world's third-largest trading currency, after the dollar and euro, with ample liquidity making it easy for investors to buy and sell yen.

Due to relatively low interest rates in Japan, the yen has been weakening for three consecutive years, making it an ideal target for so-called "carry trades," where investors borrow low-interest currencies to fund the purchase of high-yield assets elsewhere.

Institutions such as Mizuho Securities, Nomura Securities, and Mitsubishi UFJ Financial Group have all indicated that there is a risk of the yen depreciating to 150 or lower, increasing the threat of authorities intervening again. The yen has depreciated by 4.5% in the past month, raising alarms among officials and yen traders.

Yujiro Goto, Head of Tokyo Foreign Exchange Strategy at Nomura Securities, wrote in a research report that if U.S. CPI data exceeds expectations, the dollar could rise across the board, with a high likelihood of the yen attempting to return to the 150 level.

Anxiety from Tokyo is intensifying. Japan's Chief Currency Official, Jun Murai, told reporters on Monday that he is closely monitoring the currency market. Japan's newly appointed Finance Minister, Katsunobu Kato, also stated that sudden fluctuations in the yen could have negative impacts on business activities and people's lives.

Currently, the pressure to sell the yen largely stems from expectations of a stronger dollar. David Sokulsky, Chief Investment Officer at Sydney-based hedge fund Carrara Capital, stated, "I think this is not just a yen issue, the answer is simple. The focus right now is on the dollar, not the yen, and the simplest trade is to short the yen."

Economists expect that while price pressures on certain goods like used cars are rising, key indicators of U.S. inflation may slow down in September. Expectations of soft inflation increase the likelihood of positive surprises in this data.

Tsutomu Soma, a bond and currency trader at Monex Inc. in Tokyo, stated that if the CPI data is very strong, the yen "could suddenly drop to the 150 level, but I believe that due to caution about intervention, the yen will quickly rebound."

In Singapore, hedge fund Blue Edge Advisors is also monitoring the yen for further softening due to U.S. data. Calvin Yeoh, who helps manage the Merlion Fund at Blue Edge Advisors, stated:

On the path with the least resistance (despite high volatility) before all these positions disappear or data softens is the rise in US bond yields, which implies a stronger US dollar and a weaker Japanese yen.