Hedge funds have pulled back from their most bullish bets on the yen, but are continuing to pay a premium to hedge their positions, reflecting increased uncertainty about the future direction of the Japanese currency, according to a report by Bloomberg.
The report cites Ruchir Sharma, the London-based global head of FX option trading at Nomura International PLC as saying that dovish remarks from Bank of Japan Deputy Governor Shinichi Uchida on Wednesday led to a roughly one-third reduction in the relative cost of hedging against yen gains over the next month. However, despite the yen’s decline, the cost of hedging close to where the forward market was priced remained elevated, according to Sharma.
“There has been a sharp repricing lower of the premium the market will pay to buy yen calls versus selling yen puts in the one-month tenor,” Sharma said. “Fast money has been actively engaged for the past 48 hours, but corporates and real money have stayed on the sidelines, waiting for more stability before stepping in.”
The yen experienced significant fluctuations this week, surging initially as leveraged funds unwound short positions following last month’s Bank of Japan rate hike, but quickly retreated after Uchida’s comments. The currency traded below 142 yen per dollar on Monday before approaching 148 on Wednesday.
