Hedge Funds Short Dollar-Yen Stare Down Fiscal Year Squeeze

Just as hedge funds pile into wagers betting on dollar-yen weakness, signs are emerging that the pair is poised for a resurgence in Japan’s new fiscal year.
The greenback’s failure to break below 104.50, seen by major Japanese banks as a key barrier amid a congestion of buy orders, is pointing to a potential bottom for the widely traded cross. That’s bad news for speculators that suddenly turned bearish for the first time in almost a year this month as an escalation in global trade tension and a domestic political scandal spurred demand for Japan’s haven currency.
The culmination of the country’s fiscal year this week -- which has historically capped dollar strength amid repatriation flows -- month-end fund rebalancing and easing trade tensions are creating the conditions for a dollar bounce against the yen, according to traders and strategists. The rebound looks to have already begun, with the pair climbing as high as 106.41 Wednesday as Japanese importers were seen selling the domestic currency.
“With Japan’s new fiscal year starting shortly, I expect a certain degree of yen selling flows to emerge,” said Tohru Sasaki, head of Japan markets research of JPMorgan Chase & Co. Flows related to the start of the fiscal year could push dollar-yen upward toward the 111 to 112 area, he added.

The dollar-yen exchange rate fell from 115.51 to 110.11 between March 10 and March 27 last year, before rebounding to as high as 112.20 before month-end. Similar moves can be seen in 2014, 2015 and 2016.
The pair’s relative-strength reading -- a measure of momentum -- fell to 31.25 on March 23, approaching the key 30 level that’s seen as a sign the move has gone too far, too fast.
“The yen often underperforms the last week of March and this year looks set to be no different,” Kit Juckes, chief currency strategist at Societe Generale AG, wrote in a note Tuesday. “RSIs got stretched last week and that’s enough for a move.”
The yen was trading at 106.39 as of 12:11 p.m. New York time. The 105 area is an important threshold for Japan’s large manufacturers who forecasted 110.18 in their fiscal 2017 business plans, according to the Bank of Japan’s tankan survey. Chief Cabinet Secretary Yoshihide Suga said last week it’s important to have stable exchange rates, in response to a question about the yen strengthening past 105.
Favorable end-of-month flows are also poised to buoy the greenback as global fund managers with set benchmarks for currency hedge ratios re-adjust their FX exposure, according to Credit Agricole SA strategist Jennifer Hau.
“Month-end portfolio-rebalancing flows are likely to show strong USD buying across the board” after the greenback and U.S. equities underperformed over the past month, Hau wrote in a March 26 report.

Signs of easing trade tensions between the U.S. and China in recent days are also tempering haven demand, as are reports North Korean leader Kim Jong Un expressed an openness to disarmament talks during a surprise visit to Beijing.
Tokyo consumer price data and industrial production figures due this week may help flush out stale shorts, fueling a run toward the 107.49 50-DMA.
“The yen’s recent strength can be linked to the sharp unwinding of yen short positions,” said Kyosuke Suzuki, head of FX and money market sales at SocGen in Tokyo. “Flows from speculative or short-term players are key to bringing the energy for a reversal. If their views change and they consolidate dollar-yen at just below 104 or 105, then we can say the pair’s downside challenges are over for now.”