Hedge funds are doubling down on bets that the Japanese yen will strengthen against major currencies in the coming months, undeterred by last week’s volatility that tested their bullish positions, according to a report by Bloomberg citing data from the Chicago Mercantile Exchange Group (CME).
Macro hedge funds, which profit from market movements driven by economic or political events, have been actively purchasing yen call options this week against the US dollar, euro, and Swiss franc, with the CME’s options central limit order book showing that yen call options trading volume against the dollar accounted for 93% of total activity, compared to just 7% for put options, as of 2:37 pm Hong Kong time on Friday.
Additionally, all dollar-yen notional trades of at least $200m on the Depository Trust & Clearing Corporation on 20 February had strike prices at 150 or lower, signalling strong confidence in the yen’s potential appreciation.
The yen has remained more than 1% stronger this week, despite slipping to around 150.40 against the dollar on Friday morning in Tokyo after the Bank of Japan (BOJ) issued a warning on bond yields.
Recent comments from BOJ officials have reignited expectations of further rate hikes this year, prompting traders to revisit bullish yen positions. On 19 November, BOJ board member Hajime Takata emphasised the importance of continued rate increases to avoid excessive expectations of prolonged monetary easing. This week, Japan’s January inflation rate hit a two-year high, reinforcing the case for tighter monetary policy.
Swap markets are currently pricing in an 84% probability of a 25-basis-point rate hike by the end of July, with a full hike expected by September.
Last week, the yen faced pressure from strong US inflation data and optimism over a potential resolution to the Ukraine conflict. The currency fell as much as 3% against the euro and over 2% against the dollar, testing bullish positions.
