Hedge funds turned net long on the Japanese yen last week, while the currency suffered its worst weekly performance since the end of 2009 and may still have room to fall in the short term...

Driven by the dovish rhetoric of Japan's new prime minister and the strong U.S. jobs report, the yen had its worst performance since the end of 2009 last week. Prior to this, hedge funds had just started to take a bullish stance on the yen.

Data from the Commodity Futures Trading Commission (CFTC) for the week ending October 1st showed that speculative investors turned net long on the yen for the first time since mid-August. This occurred before Ishinomaki Shigeru indicated that the country was not ready for further interest rate hikes.

Moreover, the U.S. non-farm payrolls data last Friday, which exceeded all expectations, further boosted demand for the dollar and prompted the market to abandon bets on another substantial rate cut by the Federal Reserve next month.

Nomura Securities' head of foreign exchange strategy, Yujiro Goto, said, "Earlier last week, some hedge funds held long positions in yen, expecting a more hawkish stance from Japan's new prime minister Ishinomaki Shigeru (which was not the case). Coupled with the unexpectedly strong U.S. employment data, the possibility of the yen testing the 150 level against the dollar in the short term has increased."

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Last week, the yen fell 4.4% against the dollar, marking the largest drop since December 2009, as the upside surprise in employment data and Shigeru's comments prompted a rethink of the yen's trajectory. Investors, including some hedge funds, have already started shorting the yen again in high-risk carry trades, reflecting bearish sentiment on the yen.

U.S. inflation data later this week will provide further clues on the Federal Reserve's policy path and the trajectory of the yen. On Monday, the currency pair traded near 148.50.

Shoki Omori, chief strategist at Mizuho Securities in Tokyo, couldn't help but question, "If investors in carry trades push the yen-dollar exchange rate to test 160 again, who will stop it?". In his view, the currency pair will test 150 and even 155 in the short term.

CFTC data shows that hedge funds are at their most bullish on the yen since early 2021.

Some, however, see the sell-off as an opportunity to buy yen.Data compiled by Bloomberg shows that as the Bank of Japan raises interest rates, strategists still believe that the yen will strengthen further next year, with the median forecast for the yen against the US dollar in the second quarter being 140.

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management in London, wrote about the weakening yen, "The yen may still fall further in the short term, but approaching 150 could be an enticing time to start building long positions."

It is worth noting that there is a lag in the release of CFTC data, which means that leveraged investors may have digested the dovish remarks of Shigeru Ishiba and are now preparing for a new round of yen weakness.

Maximillian Lin, a strategist at Canadian Imperial Bank of Commerce, said, "Considering the shift in Federal Reserve interest rate expectations, I would not be surprised if the upcoming CFTC data as of October 8 shows a reversal in net long yen positions." He believes that this actually depends entirely on US data and the Federal Reserve's response.