Short positions on the yen surged ahead of the U.S. election, with increased market volatility under the Trump effect

The Zhitong Finance APP noted that last week, on the eve of the U.S. presidential election, hedge funds' bearish positions on the yen reached their highest level since August, indicating that many hedge funds are optimistic about former President Trump's victory in the election.

According to data from the U.S. Commodity Futures Trading Commission, as of November 5, speculative investors have increased their short positions on the yen for the fourth consecutive week, with that day being election day, when the former president won a landslide victory. After the election results were announced on Wednesday, the yen fell against the dollar, but reversed its trend the next day, ending the week slightly higher.

The so-called Trump trade includes strategies such as a stronger dollar, predicated on the elected president's promises of tax cuts and increased tariffs, which could drive up inflation and U.S. Treasury yields. However, betting on the yen is not easy, as Japanese authorities have warned against excessive actions as the dollar declines, and the yen rebounded from the sell-off following the U.S. election.

Shoki Omori, chief strategist at Mizuho Securities in Tokyo, stated, "I think this is more of a story about a stronger dollar, as we see the Trump trade becoming particularly prominent."

Omori mentioned that traders may re-engage in yen carry trades, borrowing the relatively low-yielding yen to invest in higher-yielding alternative assets.

He said, "Although the likelihood of the Bank of Japan raising interest rates in December or January is high, we tend to see an increase in yen carry trades."

Others indicated that the movement of the dollar/yen may be determined again by the difference in short-term bond yields between the two countries. Any weakening of expectations for the Federal Reserve's easing policy could boost the dollar, putting pressure on all currencies from the yen to emerging market currencies like the Mexican peso.

"The Fed's expectations are wrong," wrote Torsten Slok, chief economist at Apollo Global Management in New York, in a research report. "The economy is strong, and there are upside risks to inflation. The market's expectations for Fed rate cuts are too high."

However, the data most likely to impact the dollar/yen exchange rate is the U.S. inflation data for October, which will be released on Wednesday and will influence the Fed's interest rate path. According to a Bloomberg survey, the U.S. CPI may have risen from 2.4% in September to 2.6% last month