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Hedge Funds Burned by Yen Shorts as SVB Fear Lifts Haven Demand

(Bloomberg) -- Hedge funds held the biggest yen-bearish positions in six months last week, a painful trade as the collapse of Silicon Valley Bank suddenly boosted demand for Japan’s currency as a haven.

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Leveraged funds increased short positions on the yen to the most since September in the week through March 7, Commodity Futures Trading Commission data show. The Japanese currency rebounded from an almost three-month low reached on March 8, strengthening 3.5% in a little more than a week, as investors slashed bets on further Federal Reserve interest-rate hikes and concern about the health of the banking sector encouraged investors to hold safer assets.

“For those that simply believe in short-end rates differentials between the US and Japan, it should have been good timing to short the yen,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities Co. “Banking shock was a surprise, but given it was the fast-money community that shorted the yen, it was quick to see their position reversed.”

The dollar and the US two-year yield dropped amid banking sector fear. The two-year rate, among the most sensitive to changes in monetary policy, plunged this week to more than 100 basis points below the 5.08% intraday high touched March 8, which was the highest level since 2007. Meanwhile, the yen is headed for its largest weekly advance versus the greenback since the 5-day period through Jan. 13, rising for a third straight week.

Rescue programs are underway, easing risk-aversion moves as the biggest US banks agreed to deposit $30 billion with First Republic Bank in an effort to stem the turmoil while banks rush to borrow Fed backstop facilities.

“Markets seem to be a little bit optimistic about the situation,” Mizuho’s Omori said. “I do still see pus in all the narratives we are seeing. I see the dollar-yen grinding down despite the optimisms in banks.”

--With assistance from Ruth Carson and Garfield Reynolds.

(Updates yield levels in fourth paragraph.)

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