Chart: U.S. stock-bond correlation returns to "normal" negative correlation
Chart: Futures lower U.S. interest rate outlook
Chart: The Federal Reserve is about to cut interest rates, and the U.S. "GDPNow" still predicts that the economy will grow by 2.9%
Chart: Fed's interest rate path
Chart: Yen positions and carry trades
More currency strategists predict the yen to end the year stronger than they had expected, in the mid-140 range to the dollar, following the currency's recent surge.
The yen has gained 10% against the dollar over the past month, with the rate hovering around 147.5 in Friday morning trading. Last month it cost 161 yen to buy a dollar.
HSBC has revised its year-end forecast, putting the yen at 148 from its previous prediction of 152, according to company forex experts Joey Chew and Paul Mackel.
"Even though there seems to be some undershooting in the dollar-yen rate lately, we also acknowledge certain genuine shifts in underlying drivers," they wrote in a report on Tuesday. A string of weak U.S. economic readings and volatility in global equity markets contributed to the change, they wrote.
UBS has also updated its view, predicting the yen to close out the year at 145 to the dollar, stronger than the 160 in its previous forecast. For next year, it now sees a rate of 130 rather than the 140 it previously expected. The changes were made following the Bank of Japan's hawkish stance and the prospect of U.S. interest rate cuts, the company said in a report last week.
Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said he sees the possibility of the yen depreciating to around 150 in September before strengthening to 145. So far, "the market's concern is going too far," he said.
Yukio Ishizuki, senior foreign exchange strategist at Daiwa Securities, expects the yen to be volatile for the next few weeks. He said the yen could trade stronger than 140 or weaker to 150 before settling in the 140s toward the end of the year.
The yen has strengthened due to developments in Japan and the U.S. In Japan, the government this year began intervening to boost the weak currency, and the Bank of Japan last month surprised markets by pivoting to a hawkish monetary stance. In the U.S., the Federal Reserve at its last meeting in July kept its benchmark interest rate unchanged. Since then, soft economic data has sparked concerns about a recession.
The yen losing some of its weakness has left speculators scrambling to close bets that the currency would fall and scale back the popular carry trade practice of borrowing yen to invest in higher-yielding assets abroad. Their reaction is ultimately pushing the yen higher.
"The character of carry trade strategies is that they take many, many months to develop slowly and incrementally, but tend to get unraveled very quickly," said Chris Turner, head of forex strategy at ING in London.
"Over recent months this strategy has hit a brick wall both on the asset side and since last month, on the yen-funding side, too," he said.
Carry trades are built on low volatility and large interest rate differentials. But the yen has been highly volatile, and the BOJ not only raised rates more than expected but left the door open to additional hikes this year.
On the asset side, Mexico's June general election results undermined the peso over concerns the ruling party might pursue anti-market reforms. With an 11% interest rate, Mexico is one of the most popular emerging market recipients of carry trade funds.
Mexico's double-digit rate compares to the 0.25% rate the BOJ established last week.
While estimating the total bets that the currency would fall is difficult, investors rely on data from the Commodity Futures Trading Commission. The data shows that speculators reduced their net short yen positions by more than half as of July 30 from earlier that month.
Commodity trading advisors -- systematic, trend-following money managers who make bets on the futures market -- are still adding to their aggregate net positions in the yen strengthening and dollar weakening, said Yoshitaka Suda, a quant analyst at Nomura Securities.
CTAs have around 1.3 trillion yen ($8.9 billion) in net exposure to the yen rising and the dollar falling and are on track to expand it to 2 trillion yen over the next two weeks, according to Suda's calculations Monday.
"We would expect CTAs to call off their attack on the downside [dollar-yen] if the spot rate were to rebound to 151," he said. "But for the time being we expect CTAs' accumulation of short positions to work against any rise in the dollar-yen rate."
