By Jamie McGeever

ORLANDO FL (Reuters] – The dollar is still being bullish by hedge funds, with them holding a net dollar long position in the currency futures market for over nine months. The picture becomes blurred if you remove the Japanese currency yen.

U.S. Futures Market data showed that speculators decreased the value their overall long-dollar position relative to a variety of currencies for a week but increased their net shortyen position, the highest in three and half years.

There have been very few periods in the history of Commodity Futures Trading Commission’s (CFTC) yen-futures contracts that were initiated in 1986 when funds were less bearish about Japanese currency than they currently are.

According to the latest CFTC data, funds’ net short yen positions increased by 111 827 contracts in week ended April 12, compared with the previous week’s 103 829.

This is the highest level since October 2018. The following chart illustrates that it’s approaching historical levels.

CFTC Funds’ Yen Position https://fingfx.thomsonreuters.com/gfx/mkt/egvbkenobpq/CFTCYEN2.jpg

Dollar/Yen Vs CFTC Positions https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkmqylvx/CFTCYEN1.jpg

It is a large bet, although not nearly as severe in dollars. The current value is $11.15billion, which represents a record-breaking amount since November 2013 and a significant increase from the $10.5billion the previous week.

The only FX trade that has proved to be spectacularly correct this year has been buying dollars and selling Japanese yen. This is because of the dramatic divergence in interest rates between the U.S., Japan and Japanese and the resulting rise in dollar yields.

In the beginning stages of the largest inflation-busting round of interest rate increases since 1994, the Federal Reserve. To support an economic recovery, the Bank of Japan continues to run its large-scale stimulus program.

US-Japan 2-Year Yield Spread https://fingfx.thomsonreuters.com/gfx/mkt/movanomqxpa/USJP2Y.png

Dollar reached a 20-year high above 125.85 Yoen last week and pushed to 127.00 Yoen on Monday. The broader dollar has now reached a two year peak.

Japanese policymakers expressed dismay at the declining yen. It may take more than good-faithful words to end the rot.

“The U.S.’s-Japan monetary policy divergence will eventually determine whether the yen sees a shift in its depreciation trend and thus global inflation trends.” Barclays Shinichirokadota (LON) wrote on Monday. He said that selling pressure should continue for the yen in the short term.

However, Hedge funds have a mixed view of the dollar relative to other currencies.

According to the latest CFTC data, they have reduced their stakes in a stronger dollar over a range six major currencies including the yen from $14.136 billion to $13.22billion. This was mainly due to the euro.

Fonds have increased their net long-euro position by 11690 contracts to 39.060, an increase of $5.285 billion. Funds’ bullishest euro view has been achieved in the last five weeks.

CFTC Dollar, Euro Positions https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgkmlnpb/CFTCEUR.jpg

It isn’t working. After comments by Christine Lagarde, President of European Central Bank (ECB), the euro fell to $1.0756 last week. This was a clear indication that the ECB wasn’t in a hurry to raise interest rates like the Fed.

Analysts are predicting that in the coming months, the euro will fall to parity with its American counterpart. Funds are not preparing for this.

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After years of neglect, the Euro FX Reserve Demand has returned (Reuters 13 April).

Despite Fed’s hawkish stance, ‘Japanification’ still exists (Reuters, 29 March).

This rare crisis occurs when the yen drops (Reuters, March 15, 2015).

(The views expressed in this article are the opinions of the author. He is a columnist with Reuters.

(By Jamie McGeever. Editing by Kenneth Maxwell.