The Japanese yen may be reasserting its role as a risk-hedging currency, according to a recent research note from UBS.
After a sharp sell-off in the USD/JPY pair, analysts observed a significant unwinding of yen carry trades, which suggests that the yen is beginning to regain its traditional safe-haven status.
UBS notes that "about two-thirds of the yen carry trade have already been unwound" since a peak in early July, based on their macro attribution model.
This model, which uses regression techniques to account for FX impulses from macroeconomic drivers, shows a notable reduction in yen shorts by key market players.
Specifically, UBS says leveraged funds and asset managers have reduced their yen short positions by 78% and 82%, respectively, indicating a shift in market sentiment.
Despite the squeeze on positioning, UBS suggests that the USD/JPY's fair value overshoot has been "relatively short-lived." They estimate that, based on movements in U.S. yields and equities, the USD/JPY should be trading just under 150.
Currently, the spot rate is below this level but remains within the model's statistical range.
Interestingly, the investment bank explains that the yen's correlation with equities has turned negative once again, which interprets as a sign that the yen is "finally regaining its risk hedging properties."
This shift is said to potentially lead to a more consistent demand for yen volatility and a market preference for low-delta yen calls over puts.
UBS's findings suggest that the yen may once again serve as a reliable hedge in uncertain times, making it an attractive option for risk-averse investors.