Japanese Yen: Higher US rate volatility favors safe havens – BNY

BNY analyst David Tam suggests that rising U.S. rate volatility may favor safe-haven currencies, with the Japanese Yen historically benefiting from such situations. Increased speculative shorts on the Yen serve as an additional catalyst, as appreciation could prompt position unwinds and trigger a sharper squeeze. In their recent note, BNY argued that rising U.S. rate volatility would lead safe-haven currencies to appreciate through a combination of safe-haven and repatriation flows.

Conversely, high-beta, risk-sensitive currencies might depreciate due to a shift in global risk sentiment.

The Yen possesses a unique characteristic among low-yielding funding currencies. Historical periods of increasing rate volatility have tended to correlate with Yen appreciation, while other funding currencies have generally depreciated. In contrast, the CFTC's Commitment of Traders (IMM) data reveals near-historic levels of net short positioning of non-commercial futures positions in the Swiss Franc and Yen.

The Yen has experienced a steady decline since April 2025, when trend-following traders, such as Commodity Trading Advisors (CTAs) and other momentum traders, began unwinding their substantial net long positions following Liberation Day.

This divergence in positioning could present a trading opportunity, as real money investors are preparing for defensiveness, while fast money investors are leaning the opposite way. This potential market vulnerability could lead to a sharp squeeze. For investors expecting the Yen to appreciate, the positioning divergence suggests a potential upside in both Yen and Swiss Franc. The Yen is considered the more reliable trade, as forced position unwinds by speculators should result in a more pronounced move.