(Sept 9): Hedge funds are betting the yen will strengthen beyond 150 per dollar by year-end, with some longer-dated options trades targeting a move to 140.
The most active dollar-yen option on Tuesday was a put option expiring in November with a 142.86 strike price, according to Chicago Mercantile Exchange Group data, with the total put volume of contracts expiring by year-end being over triple that of calls. Puts on the pair gain in value as the dollar weakens. Dollar-yen fell 0.4% to 153.32 as at 3.25pm in Hong Kong (same time as Malaysia) on Wednesday.
“Leveraged investors have been active and reacting to a potential regime change in the currency,” said Jerry Minier, global head of linear G-10 FX trading at Citigroup in London. “Option structures targeting dollar-yen below 150 by year-end have been popular.”
The yen’s resilience despite last week’s robust US payrolls report has emboldened investors to bet on further gains, Minier added.
The currency pair fell nearly 5% in the week through Tuesday before paring some losses as investors rushed to unwind yen-funded carry trades. The move followed hawkish comments from Bank of Japan Governor Kazuo Ueda and board member Hajime Takata. Its fall below 155, a support level that it never managed to breach in May despite the Japanese Ministry of Finance’s market intervention, has encouraged traders to add bearish positions through options.
US Treasury Secretary Scott Bessent even challenged traders on Tuesday to try to counter his efforts to strengthen Japan’s currency, touting that when he makes market calls nowadays, he’s effectively doing so with inside information.
Nomura has seen a similar shift toward bearish dollar-yen sentiment among macro hedge funds that seek to profit from market swings triggered by economic or political events.
There has been “much stronger demand for downside in the option space from the macro community who have shifted to increasing shorts, particularly since we broke 155.00 as most viewed that as a support line in the sand,” said Graham Smallshaw, Singapore-based senior foreign-exchange spot trader at Nomura. While there was some profit-taking on Sept 8 when the pair dipped below 153, “the view for now is very much concentrated on the 150/152 target,” he added.
The stance contrasts with that of Japanese retail investors, who boosted their net short-yen positions to an estimated ¥3.61 trillion (RM96 billion) last week, according to a Bloomberg compilation of data from the Financial Futures Association of Japan and Tokyo Financial Exchange Inc. Wall Street strategists are also divided over whether the yen’s rally will last, with the likes of Wells Fargo & Co striking a cautious note on expectations that policymakers may struggle to deliver more rate hikes than markets anticipate.
But in the options market, demand is also extending into 12-month contracts, with some traders using digital options and other option spreads to target levels as low as 140, according to Smallshaw. Digital options pay a fixed amount if the pair finishes beyond a predetermined level at expiry.
Standard Chartered Bank has also seen strong client demand for options that benefit if other currencies besides the dollar weaken versus the yen.
“Most people are looking to play it via outright downside vanilla options,” said Saurabh Tandon, Singapore-based global head of FX options at the bank. A standard, or vanilla, option has no special conditions attached to it, unlike other types of options.
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