(Bloomberg) -- Leveraged funds have turned bullish on dollar-yen as they rush into positions that project the currency pair will rise as much as 5% in the coming months.
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Hedge funds piled into bullish dollar-yen options trades following hawkish Federal Reserve and dovish Bank of Japan interest rate decisions last week. Those verdicts have also dampened the mood for the Japanese currency with the market now feeling less optimistic about the yen’s outlook.
Dollar-yen’s trading volume on The Depository Trust & Clearing Corporation surged Dec. 19 following the central bank decisions with volume totaling over $23 billion which topped this month’s previous high of around $15 billion. Dollar-yen was the most active currency pair in option trading on DTCC on Monday as of 2:19pm Tokyo time.
“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,” says Mukund Daga, Singapore-based head of FX options for Asia at Barclays Bank Plc. Dollar-yen closed Friday at 156.31 and the yen was trading down 0.2% at 156.61 at 1:58 p.m. Tokyo time.
According to other traders many of the bullish options trades had contract lengths that covered the two central banks’ next interest rate decisions in January. The premium to hedge the currency pair’s downside over the next two months, compared with its upside, fell by the most in three months on Dec. 19 on the back of the surge in demand for call options. Both Asian and European hedge funds bought these bullish call options.
“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.” says Sagar Sambrani, London-based FX derivatives trader at Nomura International Plc.
Dollar-yen rose to a five-month high last week after a bullish breach of its November peak, opening the door for further gains. However, funds will still be wary of possible intervention by Japanese authorities should the currency continue to weaken.