(Bloomberg) — A further unwind of sizable short positions could accelerate the yen’s gains if it strengthens past 155 per dollar, according to JPMorgan Chase & Co. strategists.
“Recent price action appears to corroborate our view that a relatively large JPY short position may still be outstanding,” strategists including Junya Tanase wrote in a note. If dollar-yen breaks below 155, “the risk cannot be ruled out that selling could beget further selling and drive a larger-than-expected yen appreciation.”
JPMorgan estimates ¥16 trillion ($102.6 billion) to ¥17 trillion of bearish yen positions remain outstanding and says a complete unwind could theoretically push dollar-yen into a 142-146 range.
The warning comes after one of the currency’s sharpest rallies since Japan and the US jointly intervened to support it in late July. Dollar-yen climbed to 160.39 earlier this week, its highest since that operation, before reversing sharply to as low as 155.30. The move has brought the pair within a whisker of its post-intervention low of 155.23.
The rally has been fueled by speculation over a potential shift in the Government Pension Investment Fund’s asset allocation and mounting expectations for faster Bank of Japan rate hikes. Market watchers say those catalysts have been amplified by an unwind of speculative yen shorts and hedging demand from domestic investors, raising the risk that further gains could force more bearish positions to be closed.
Still, JPMorgan says expectations around both GPIF and BOJ “look a bit excessive,” and doesn’t see a high probability for now of dollar-yen falling materially below its assumed 155-165 range.
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