Speculators had been paring some of their bearish yen bets with net-short non-commercial positions falling to the lowest this year at the end of June, according to data from the Commodity Futures Trading Commission. But sizable shorts remain and hedging costs have continued to push higher amid a debate whether the yen could fall through the closely-watched 140 level.

Some strategists see the yen strength -- and the recent pause in the dollar’s rally -- as temporary.

“At the moment the dollar-yen looks like it could remain under further pressure in the very short term,” said Laura Fitzsimmons, executive director of macro rates and FX sales at JPMorgan’s Australian unit. But “unless you see a shift in the BOJ’s tone,” the short-yen macro trade is still on.

Eoin Treacy's view

The short covering rally in the Yen is coincident with short covering in stock markets  and is a further sign the risk-on trade is gaining traction. The assumption this interest rate hiking cycle will be finished by the end of the year is a base case for this bullishness.
The Yen is deeply oversold, and today’s rebound breaks the sequence of lower rally highs. A potential reversion towards the mean would take it back to the region of the 2015 lows.