Hedge funds re-enter the market. Will the yen arbitrage trading that once caused a market explosion make a comeback?

According to the Wisdom Financial APP, arbitrage trading centered on the Japanese Yen seems to be quietly resurging. Nomura International observed that various investors are once again borrowing Japanese Yen and investing the proceeds in other higher-yielding assets. This indicates that corporate clients and hedge funds who have always been keen on arbitrage trading are re-engaging in these transactions.

Since August 5th, the Japanese Yen has depreciated by over 5% against the US Dollar, driven by changes in Japan's hawkish monetary policy, concerns about US corporate earnings, and a weak employment report that pushed the Yen to a seven-month high.

Antony Foster, Head of G10 Spot Trading at Nomura Securities in London, stated that after better-than-expected US retail sales data, arbitrage trading "has clearly made a comeback." He mentioned that multiple accounts have sold Yen to buy Australian Dollars and British Pounds.

In the past week, short positions on the Yen at ATFX Global Markets have increased by around 30% to 40%, with a significant portion being driven by hedge funds and high-net-worth investor clients.

William Vaughan, Deputy Portfolio Manager at Brandywine Global Investment Management, commented on carry trades and the investors involved in such trades, saying, "People have very short memories, and there are a lot of momentum traders in this space."

For investors still on the sidelines watching carry trades, a key question is whether the Bank of Japan will raise interest rates again this year. Bank of Japan Deputy Governor Shinichi Uchida has stated that policymakers will not raise rates further if financial markets are unstable.

If the Bank of Japan remains on hold, the allure of re-entering the currency markets will increase.

Bank of Japan Governor Haruhiko Kuroda is set to speak at the parliament on August 23rd, and traders may gain further insights into the Yen's direction this week. If Federal Reserve Chairman Jerome Powell refutes some traders' bets during his speech at the Jackson Hole symposium on the same day that the Fed will cut rates by 50 basis points in September, traders may become more emboldened.

Since touching 141.70 Yen per US Dollar on August 5th, the Yen has slipped to 149 Yen per US Dollar, but given the sudden surge of the Yen earlier this month, investors remain cautious about selling the Yen. Foster from Nomura Securities stated, "A significant amount of excess short Yen positions have been cleared, but this market is extremely fragile."

The fragility has been evident as the latest data from the Commodity Futures Trading Commission (CFTC) shows that speculative traders significantly retreated from their short Yen positions in the week ending August 6th.

Although the remarks of Kuroda and Powell have paved the way for investors to enter the market, it does not mean they will act hastily. M&G Investment Management has trimmed some of its long Yen positions, stating that while the Yen is undervalued, this situation may persist for some time.

Jim Leaviss, Head of the Fixed Income Department at M&G and one of the UK's most renowned bond investors, mentioned that the Yen "is indeed cheap, but we are not foolish enough to think it will quickly return to fair value." "

Nick Twidale of ATFX believes that there is evidence to suggest that investors are re-entering short positions on the Japanese yen as part of a strategy to purchase high-yield assets. The Chief Analyst in Sydney stated, "Arbitrage trading remains very important."

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