Yen shorts crumble as 2022’s hottest FX trade comes to an end | Ruth Carson & Chikako Mogi / Bloomberg News

Three key pillars of the sell-the-yen trade—a widening US-Japan interest-rate gap, soaring oil prices and the loss of the currency’s haven status—are crumbling as growing recessionary fears keep a cap on yields, put pressure on crude and send investors back into the arms of traditional safe assets. Dollar-yen, which soared 38 percent from a March 2020 trough to mid-July this year, is in retreat.

An end to what threatened to become the worst-ever drawdown for the currency would be welcomed by businesses to consumers to politicians in Japan, where higher import costs are weighing on a post-pandemic recovery. It would vindicate the resolutely dovish stance of Bank of Japan Governor Haruhiko Kuroda and put pressure on hedge funds that came late to popular short-yen macro strategies.

Benchmark Treasury yields have fallen more than 60 basis points from their peak in June to 2.82 percent on Monday. The yen has strengthened over 3 percent from its trough to around 135.25. “The energy terms of trade shock is easing, particularly if you look at oil prices,” said NAB’s Catril. While a spike in gas prices and US 10-year bond yields would be key risks to watch, dollar-yen should trade around current levels before landing at 130, he said. The yen jumped 1.3 percent last Monday when traders learned that US House Speaker Nancy Pelosi would visit Taiwan, sparking worries of potential retaliation from China.

While Goldman Sachs Group Inc. sees the yen rising over the long term, “further depreciation pressures are likely” as the BOJ clings to its yield-curve control policy during Kuroda’s term, strategist Isabella Rosenberg wrote in a note.

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