Japanese Yen: Higher US rate volatility favors safe havens – BNY

BNY's David Tam argues that rising U.S. rate volatility should favor safe-haven currencies, with the Yen historically benefiting from such episodes. Heavy speculative JPY shorts add another catalyst, as appreciation could force position unwinds and trigger a sharper squeeze.

Heavy Yen shorts raise squeeze risk

"We argued in our recent note that rising U.S. rate vol will lead safe-haven currencies to appreciate through a mix of safe-haven and repatriation flows. Conversely, high-beta, risk-sensitive currencies could depreciate due to a shift in global risk sentiment."

"The JPY exhibits a unique property among low-yielding funding currencies. Historical bouts of increasing rate vol tend to correlate with JPY appreciation while other funding currencies tend to depreciate."

"By contrast, the CFTC’s Commitment of Traders (IMM) data shows near-historic levels of net short positioning of non-commercial futures positions in the CHF and JPY. The JPY has seen a steady march down since April 2025, when trend-following traders such as CTAs and other momentum traders first began unwinding their historic net longs in the wake of Liberation Day."

"This positioning divergence could create a trading opportunity: With real money investors preparing for defensiveness and fast money investors leaning the other way, markets could be vulnerable to a sharp squeeze. For investors who expect JPY to appreciate, the positioning divergence argues for upside in both JPY and CHF. The JPY is the cleaner trade: if speculative shorts are forced to unwind, the move should be sharper."