Yen Exchange Rate: Information Reflected by Changes in Speculative Fund Positions

■ Recent foreign exchange market intervention reached a record high every month, suggesting the authorities may be aiming to buy time to curb the yen's depreciation.  

■ Speculative funds expanded their short positions in the yen again in May. For the USD/JPY exchange rate to continue rising, it needs to shift from a "yen depreciation-driven" to a "dollar strengthening-driven" model. 
 
On May 29, the Japanese Ministry of Finance released the "Implementation Status of Foreign Exchange Stabilization Operations (Monthly Data, April 28 to May 27)". The data show that the actual intervention scale for buying yen and selling dollars during this period reached 11.7349 trillion yen, a record high for the month. According to LSEG data, the USD/JPY exchange rate fell from a high of 160.72 on April 30 to a low of 155.02 on May 6, a cumulative drop of about 5 yen; however, it rebounded again from May 11, rising back to the latter half of the 159-yen range in about two weeks. The author believes that the purpose of the Japanese authorities' foreign exchange market intervention this time is not to push the exchange rate toward yen appreciation, but to buy time to curb the yen's depreciation. 

 
During this period, changes in speculative positions are noteworthy. According to data from the U.S. Commodity Futures Trading Commission (CFTC), which is considered to reflect some of the movement of speculative funds, as of the latest week ending May 26, net short positions in the yen (i.e., short yen minus long yen) expanded to approximately 114,000 contracts, higher than the week before this round of intervention (approximately 102,000 contracts). Looking solely at short yen positions, they increased to approximately 227,000 contracts, exceeding the approximately 222,000 contracts of the week ending July 9, 2024. When implementing actual interventions, Japanese authorities often consider "sharp fluctuations caused by speculative trading" as the problem. The expansion of short yen positions by speculative funds may be interpreted by the authorities as a further increase in speculative activity, thereby raising market vigilance regarding intervention. Therefore, this author believes that the USD/JPY range of 160-162 should still be considered a warning line for intervention by the Japanese authorities. 

 
During this period, signs of yen carry trades also emerged in areas such as the currency options market. By the end of May, the implied volatility of the one-month at-the-money (ATM) rate for USD/JPY had fallen to just over 6%, the lowest level since February 2022. In cross-currency pairs, the volatility of EUR/JPY fell to the mid-5% range, the lowest since September 2021; the volatility of AUD/JPY fell to the late 7% range, the lowest since March 2024, indicating that the overall volatility of the yen exchange rate is declining. Furthermore, major stock indices in both Japan and the US continued to hit record highs, easing excessive pessimism among investors and also considered a significant factor driving speculative funds to expand their short yen positions in May. 

 
In summary, the changes in speculative fund positions over the past month can be attributed to shifts in the current financial market environment. At the same time, the space for speculative funds to further expand their short yen positions is shrinking, while the Japanese authorities' vigilance regarding foreign exchange market intervention has increased. Therefore, if USD/JPY attempts to break through the 160 level in the short term, it will be difficult to rely solely on yen depreciation; the market will need to shift into an upward trend driven by a stronger dollar. Next, attention should be paid to the performance of US economic data this week.