Hedge funds have turned bullish on the dollar-yen, with many rushing into positions that expect the currency pair to rise by as much as 5% in the coming months, according to a report by Bloomberg UK.
Following hawkish interest rate decisions from the Federal Reserve and dovish moves from the Bank of Japan last week, hedge funds have heavily bought into dollar-yen options, betting on the pair’s strength.
These central bank actions have led to a more pessimistic outlook for the yen, with market sentiment shifting in favour of the dollar.
On 19 December, trading volume in the dollar-yen currency pair surged to over $23bn on The Depository Trust & Clearing Corporation, eclipsing the previous monthly high of about $15bn. As of 2:19 PM Tokyo time, dollar-yen was the most actively traded currency pair on DTCC options.
Mukund Daga, the head of FX options for Asia at Barclays Bank in Singapore, stated, “We have seen hedge funds buying outright USD/JPY calls or digital with a view of the currency pair rising to 160-165 range despite warnings by Japan’s finance minister and the Ministry of Finance.” At that time, dollar-yen was trading at 156.61, down 0.2% from Friday’s close of 156.31.
Traders noted that many of these bullish options had expirations tied to the upcoming interest rate decisions by both central banks in January. On 19 December, the premium to hedge against the downside of the currency pair, compared to the upside, saw its largest drop in three months, driven by increased demand for call options. Both Asian and European hedge funds were particularly active in these bullish trades.
Sagar Sambrani, an FX derivatives trader at Nomura International in London, explained, “USD/JPY topside has seen renewed interest for Q1 ’25 on divergence between Fed and BOJ expectations and is supported by the broader dollar strength, and these trades have been expressed via outright digitals as well as leveraged structures which are plays on moderation in spot momentum as it approaches the key level of 160.”
After breaking its November peak, the dollar-yen rose to a five-month high last week, opening the possibility for further gains. However, funds remain cautious about the potential for intervention from Japanese authorities if the yen continues to weaken.
On Friday, Japan intensified its warnings against currency speculation amid the yen’s slide.
“The government’s deeply concerned about recent currency moves, including those driven by speculators,” Japanese Finance Minister Katsunobu Kato said. “We will take appropriate action if there are excessive moves in the currency market.”
