BNY says cross-border clients have largely capitulated on long positions in Japanese yen (JPY) and South Korean won (KRW) as both stay weak against the US dollar (USD) and Chinese yuan (CNY). iFlow data show any residual JPY and KRW longs have collapsed, while intervention is described as ill-suited to deliver structural appreciation. Oil\u2019s decline has reduced balance-of-payments support for further depreciation, and the USD carry impulse has ebbed after Fed Chair Kevin Warsh\u2019s latest remarks were not read as excessively hawkish.<\/p>\n
The note adds that China has stayed quiet on JPY, KRW and Taiwan dollar (TWD) valuations, alongside limited US pushback. US Treasury Secretary Scott Bessent said in January the KRW was not trading in line with fundamentals, yet the currency has weakened further. With prospective regional rate hikes expected to be softer than those of developed-market peers outside Asia, the analysis points to geopolitics and AI supply-chain strategy as potential catalysts, including signalling via the semiannual currency report, that could prompt a sharp adjustment and leave JPY, KRW and TWD prone to strengthening.<\/p>\n
We see that traders have finally given up on betting for a stronger Japanese Yen and South Korean Won, as both currencies remain near multi-decade lows against the US Dollar. With USD\/JPY hovering around 172 and USD\/KRW pushing past 1450, the latest CFTC data shows non-commercial net short positions on the Yen are at their highest level since June 2024. This extreme positioning suggests the trade is crowded and vulnerable to a reversal.<\/p>\n
The fundamental reasons for continued currency weakness are fading. Japan\u2019s core inflation, released last week, came in at 2.5%, keeping pressure on the Bank of Japan to follow its tentative rate hikes from earlier this year with more concrete action. Similarly, the dramatic fall in oil prices to below $65 a barrel for WTI crude has significantly improved the terms of trade for energy importers like Japan and South Korea, which should support their currencies.<\/p>\n
On the other side of the equation, the case for a persistently strong US Dollar is also losing steam. The latest US Personal Consumption Expenditures (PCE) Price Index for May 2026 showed a continued cooling trend at 2.6% year-over-year, weakening the argument for the Federal Reserve to maintain a hawkish stance. This diminishes the appeal of the USD carry trade, which has been a primary driver of its strength.<\/p>\n
The most important catalyst, however, may come from US strategic policy related to the AI supply chain. We believe the US administration is growing concerned that the weakness in the JPY, KRW, and TWD makes critical technology from Asia, like high-bandwidth memory and advanced semiconductors, too cheap. This could inadvertently subsidize competitors, a risk highlighted by a recent Commerce Department review on supply chain security announced in late June 2026.<\/p>\n
Given this backdrop, we think the risk is now skewed towards a sudden and sharp appreciation in these Asian currencies. With market positioning so lopsided, any coordinated policy signal from the US, perhaps through its upcoming Treasury currency report, could trigger a significant rally. We are therefore looking at low-cost derivative structures, such as buying out-of-the-money call options on JPY and KRW, to position for this potential upside shock in the coming weeks.<\/p>\n\n\n\n