Yen Trades Surge as Hedge Funds Reassert Bullish Bets
Despite recent volatility, hedge funds have reignited their bullish stance on the Japanese yen, anticipating its outperformance against major currencies in the coming months.
Macro hedge funds, capitalizing on market shifts driven by geopolitical and economic events, have significantly increased their purchases of yen call options against currencies like the dollar, euro, and Swiss franc. This week, call options for yen against the dollar on the Chicago Mercantile Exchange Group outnumbered put options by seven-fold.
The yen has maintained its strength this week, despite a temporary dip against the dollar on Friday. Nomura's senior FX spot trader, Graham Smallshaw, observed a resurgence of interest in yen purchases by funds.
Influenced by Bank of Japan (BOJ) rhetoric, traders have renewed their focus on the likelihood of further interest rate hikes. The BOJ's Hajime Takata emphasized the need to continue rate increases to prevent inflated expectations of monetary easing.
"The market has pivoted towards bullish yen positions across both dollar-yen and yen crosses," noted Ivan Stamenovic, head of Asia Pacific G-10 FX trading at Bank of America. "Tactical and short-dated yen calls remain dominant for now."
Japan's inflation has surged to its highest level in two years, providing justification for further BOJ hikes. Swap markets indicate an 84% chance of a 25-basis-point increase by July, with a full hike expected by September.
Smallshaw observed that while hedge funds are targeting further depreciation of dollar-yen, they are also exploring longer-dated downside option structures for Swiss franc-yen amid expectations of a potential resolution to the Ukraine crisis, which could lead to an unwinding of long Swiss franc positions.