Collapse of The SVB Increased Demand for Shelter Currencies

Last week, hedge funds retained their biggest yen bear positions in 6 months in what was a painful trade, as the collapse of Silicon Valley Bank suddenly boosted demand for the Japanese currency as a safe haven.

According to data from the Commodity Futures Trading Commission, leveraged funds increased short yen positions to the highest since September in the week to March 7. The Japanese currency rebounded from a nearly 3-month low hit on March 8, gaining 3.5% in just over a week as investors promptly liquidated bets on further Federal Reserve rate hikes and concerns over the health of the banking sector led investors to hold safer assets.

For those who simply follow arbitrage trades in the difference in short-term rates between the U.S. and Japan, this happened to become a good time to sell the yen. The bank shock was a surprise, but given that these were the money market funds that led the game, as the shorts sellers were threatened to become squeezed, which accelerated the rise of the yen. Since Wednesday, March 15, Japanese yen strengthened by almost 2.2% currently trading at 132.33 per USD.