Bank of Japan's rate hike struggles to boost the yen; hedge funds rebuild short positions; US dollar long positions keep increasing.

According to Zhitong Finance APP, despite the Bank of Japan raising interest rates as scheduled last month, the central bank's policy stance did not meet the market's hawkish expectations. Coupled with the still significant US-Japan interest rate differential, the yen continues to face depreciation pressure. The latest data from the US Commodity Futures Trading Commission (CFTC) shows that hedge funds have re-established short positions on the yen, reversing two consecutive weeks of bullish bets. Meanwhile, speculative funds have further increased their long positions in the US dollar and, for the first time since 2024, shifted to a net short position on the pound, reflecting heightened bullish sentiment toward the US dollar in the foreign exchange market.

According to CFTC data, as of the week ending September 29, the nominal size of leveraged funds’ net short positions on the yen amounted to about 210 billion yen (approximately USD 1.3 billion). Specifically, leveraged funds' net yen positions shifted from a net long of 4,472 contracts the previous week to a net short of 16,809 contracts, marking a change of 21,281 contracts in just one week and a complete reversal of the bullish positions accumulated over the prior two weeks.

The yen has weakened against the US dollar for a third consecutive week. Despite recent comments from Japanese government officials regarding the yen's ongoing weakness and its potential impact, these have failed to effectively reverse the yen’s declining trend. The Bank of Japan raised rates last month in line with market expectations, but its policy stance did not convince traders of any more aggressive tightening moves ahead. At the same time, the substantial interest rate gap between Japan and the US continues to pressure the yen.

It is notable that different types of investors have shown clear divergence in their outlook on the yen. While leveraged funds have turned bearish again, asset management institutions have further increased their long positions in the yen. Data shows that as of the week ending September 29, asset management institutions increased their net long yen positions by 9,463 contracts to 51,961 contracts, indicating that institutional investors have not yet formed a consensus on the yen’s future trajectory.

Meanwhile, speculative funds have become increasingly bullish on the US dollar. CFTC data reveals that, for the week ending September 29, leveraged funds increased long bets on the dollar while expanding net short positions on euro and Canadian dollar among other major currencies. Specifically, net short positions in euro increased by 23,640 contracts to 82,445 contracts, and net short positions in Canadian dollar rose by 23,396 contracts to 72,519 contracts.

Changes in pound positions are also noteworthy. Data shows that leveraged funds shifted from a net long position of 6,519 contracts to a net short of 5,377 contracts—the first net bearish tilt on the pound since 2024. At the same time, the GBP/USD exchange rate fell to a three-month low this week, reflecting continued pressure on the pound.

Among other major currencies, leveraged funds reduced net long positions in the Australian dollar by 570 contracts to 55,114 contracts; net short positions in the New Zealand dollar decreased by 3,762 contracts to 1,454 contracts; net short positions in the Swiss franc decreased by 1,603 contracts to 17,017 contracts. In contrast, the Mexican peso continues to attract some speculative funds, with net long positions increasing by 1,417 contracts to 80,677 contracts.

From the position changes of asset management institutions, there are also marked differences in their attitudes toward major currencies. In addition to increasing their net long yen positions, such institutions also increased their net long euro positions by 487 contracts to 245,160 contracts. However, these institutions notably boosted bearish bets on the pound and Australian dollar during the same period. Net short positions in the pound rose by 11,740 contracts to 125,424 contracts, and net short positions in the Australian dollar increased by 17,845 contracts to 73,073 contracts.

Additionally, asset management institutions increased net short positions in the New Zealand dollar by 9,743 contracts to 21,228 contracts; increased Canadian dollar net short positions by 3,116 contracts to 25,949 contracts; and increased Swiss franc net short positions by 888 contracts to 36,411 contracts. As for the Mexican peso, asset management institutions sharply reduced their net long positions by 29,255 contracts to 16,251 contracts.

Overall, the latest CFTC position data indicates that the Bank of Japan’s rate hike has yet to reverse the yen’s weakness, while the US-Japan interest rate differential remains a key factor affecting the yen. Against this backdrop, hedge funds have re-established short positions on the yen and further increased their bullish bets on the US dollar. However, asset management institutions continue to add to yen longs, highlighting the ongoing divergence in outlooks among different investor types. Whether the yen can stabilize going forward will depend on the Bank of Japan’s subsequent policy stance, changes in the US-Japan interest rate differential, and the overall performance of the US dollar.