In a dramatic trend reversal mirroring the dollar's recent strength, speculators in IMM yen futures built a fresh net short position in the week ended February 24, data from the Commodity Futures Trading Commission showed on Friday.
The last time that speculators had a net short position in yen futures was in early August last year. Analysts say the change in the trend reflects expectations that the dollar's upward charge against the Japanese currency will continue.
The data from the CFTC's Commitments of Traders report on speculative positioning are used by analysts as an indicator of future market direction.
For example, extreme net long speculative positions often signal a decline in the currency, especially if that position conflicts with the positioning of the more influential commercial players.
Speculators generally are trend followers seeking to pick a precise top or bottom in the market.
The CFTC data show that speculators in yen futures built fresh net short positions of 12,181 contracts in the latest week, from a net long position of 55,198 contracts in the previous week.
"We saw what happened in the FX market," said Lauren Germain, currency strategist at Banc of America Securities.
"Everyone got out of that short dollar/long yen trade after the yen failed to move on the strong Japanese GDP numbers last week," Germain said. "That was when the speculative market and the FX market got out of that trade."
Analysts say the dollar is likely to continue to grind higher, with the key 110 yen level now clearly in sight.
Japan received fresh support this week for its intervention strategy when the International Monetary Fund said explicitly that the strategy is aimed at fighting deflation rather than an attempt to compete unfairly.
The fact that a key institution like the IMF is backing Japan's strategy will encourage the continuation of its intervention policy, boosting the dollar against the yen, analysts say.
But given the surfeit of capital inflows to Japan, analysts believe the trend is still for the yen to strengthen, after the dollar's upward correction runs its course.
"We still think that the dollar/yen is overbought and that it is probably going to come down," Germain said. "Probably this will be evident in IMM contracts in the next few weeks."
Meanwhile, the CFTC data showed speculators slightly reducing their net long euro positions to 26,367 contracts for the latest week, down from 28,409 contracts in the previous week.
The euro traded in a range of roughly between $1.24 and $1.27 this week, after hitting an all-time peak of $1.2927 last week.
Speculators also increased their net short positions on the Canadian dollar to 6,776 contracts, the lowest since April 2002. Last week's net short position was 373 contracts.
Analysts say this reflects expectations that the Bank of Canada will cut rates next Tuesday.