International Monetary Market currency speculators in the week ended July 25 increased their bets against the yen to record levels, data released on Friday showed, but they may already have started to unwind some of them.
Net short yen positions were increased to 76,886 contracts from 69,049 contracts the previous week, data from the Commodity Futures Trading Commission showed. That amounts to a net short position worth $8.2 billion, according to Reuters calculations.
But a host of fundamental factors suggest short-term investors will pare back that substantial position. "I think the market is unsustainable long dollar/yen," said Richard Franulovich, senior currency strategist with Westpac Bank in New York.
Since hitting an intraday high of 117.39 yen on Tuesday, the dollar has dropped to 114.75 yen, its lowest in two weeks. The decline of nearly 3 yen in as many sessions suggests some investors were squeezed out of their long dollar and short yen positions.
Also since Tuesday, the futures market has reflected falling chances of a Federal Reserve interest rate hike in August, based on reports the US economy is slowing.
By contrast, Japan's economy appears to have emerged from deflation and is recovering from years of sluggishness. "This is an environment in which the yen should play a bit of catch up," Franulovich said.
The 7,837 increase in short yen positions on the IMM was the main factor behind the overall net short US dollar position being halved to $2.2 billion from $4.1 billion in the prior week, according to Reuters calculations.
That is the net US dollar position on the IMM against the euro, yen, sterling, Swiss franc and Australian and Canadian dollars. Being "long" a currency is effectively a bet it will strengthen, while being "short" is a bet it will weaken.
Extreme market positioning often suggests a currency is poised to snap back, largely because investors are uncomfortable holding increasingly large exposure in a currency over an increasing length of time.