- Global hedge funds are betting the dollar-yen exchange rate will fall below 150 yen by year-end.
- The dollar-yen exchange rate fell about 5% over the past week as an unwind of the yen carry trade and expectations for additional Bank of Japan rate hikes gathered pace.
- Options bets targeting short dollar-yen positions and a decline to the 140-yen level are expanding, led by macro hedge funds.
Forecast Trend Report by Period
Global hedge funds are betting the yen will strengthen further, with the dollar-yen exchange rate potentially falling below 150 by year-end.
Bloomberg reported on September 8 that the most actively traded dollar-yen option on the Chicago Mercantile Exchange that day was a put option with a strike price of 142.86 yen and a November expiry. Trading volume in put options expiring by year-end was more than three times that of call options. A dollar-yen put increases in value as the yen strengthens against the dollar.
The dollar-yen exchange rate was trading near 153.61 in Hong Kong on the morning of September 9.
“Leveraged investors are moving aggressively to respond to a potential regime shift in currency markets,” said Jerry Minier, Citigroup’s global head of G10 foreign-exchange trading. He added that option strategies targeting a move below 150 in dollar-yen by year-end are gaining popularity.
Bets on further yen gains are also increasing as the currency’s recent strength has proved more resilient than expected. The yen has held firm despite strong U.S. employment data, while rising expectations for additional rate hikes by the Bank of Japan have accelerated the unwinding of yen carry trades.
The dollar-yen exchange rate fell about 5% in the week through September 8. The yen strengthened after hawkish remarks from Bank of Japan Governor Kazuo Ueda and board member Hajime Takata prompted a rapid unwind of positions that had borrowed yen to invest in higher-yielding assets.
The break below 155 yen per dollar, a level widely viewed by the market as key support, further reinforced hedge funds’ bullish yen bets. Nomura said demand for options wagering on a decline in dollar-yen has risen sharply, led by macro hedge funds that invest in broad economic trends.
Graham Smallshaw, a foreign-exchange trader at Nomura, said macro investors have increased short dollar-yen positions since the breach of 155. The market’s main target range is now concentrated around 150 to 152.
Over a longer horizon, investors are also placing bets on the yen strengthening to 140 per dollar. Some are using 12-month digital options and option spreads to build positions for a scenario in which dollar-yen falls to 140, Bloomberg reported.
