A rare CME shift: Hedge funds abandon structural shorts to bet on a bitcoin rally

Hedge funds substantially reduced their bearish bets on the Japanese yen after US and Japanese authorities coordinated to stabilize the currency, according to a Bloomberg report. The Commodity Futures Trading Commission (CFTC) data showed that leveraged investors trimmed their net short yen position in futures and options markets by roughly half, to about 63,600 contracts as of August 4.

This marks a dramatic reversal from late June, when hedge funds held nearly 138,000 net short contracts, the largest bearish position against the yen since 2007. The intense bearish positioning emerged as the yen weakened to its weakest level since 1986, driven by an interest-rate gap between the US and Japan that encouraged investors to bet on further yen depreciation.

However, official intervention by both governments prompted traders to reassess the risks of remaining heavily short. Furthermore, shifting expectations for monetary policy in both nations contributed to the retreat. While the Bank of Japan maintained its benchmark interest rate unchanged at its latest meeting, overnight index swaps now indicate a 60% chance of a rate increase by September.

Conversely, expectations for US monetary policy have become less hawkish. A weaker-than-expected US employment report further pressured the dollar and lowered the probability of further Federal Reserve tightening. Consequently, the combination of official intervention and changing interest-rate expectations has made maintaining such large yen short positions considerably less attractive for hedge funds.

The rapid reduction in short exposure also signals potential for further volatility in the yen if traders continue unwinding bearish positions, especially if expectations for a Bank of Japan rate increase intensify or US rate expectations shift further.