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Macro

Hedge Funds Bet on Dollar-Yen Hitting 160 Amid US Inflation Data

Hedge Funds Bet on Yen Falling to 160 Despite Japan's Intervention Efforts Amid US-Japan Yield Gap

By Alex P. Chase

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5/8, 23:08 EDT
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Key Takeaway

  • Hedge funds are betting on the dollar-yen rising to 160, buying 1-3 month reverse knock-out call-option contracts despite recent yen support.
  • Market anticipates a "grind" higher in USD/JPY, wary of Japanese authorities' intervention threats but sees topside capped at 160.
  • Demand for these options has tightened the put-call pricing gap, with a significant move dependent on upcoming US inflation data.

Renewed Pressure on the Yen

Hedge funds have resumed their bearish bets against the yen, purchasing one- to three-month dollar-yen reverse knock-out call-option contracts, signaling expectations for the currency to weaken further. This move comes despite recent interventions suspected by Japanese authorities aiming to support the yen, which had rallied from a 34-year low. The yen has depreciated 1.6% this week, with market sentiment suggesting a cap at 160 by authorities, according to Ruchir Sharma, global head of FX option trading at Nomura International Plc.

Intervention Speculations Amid US-Japan Yield Gap

The yen's weakness is exacerbated by a wide yield gap between the US and Japan, alongside comments from US Treasury Secretary Janet Yellen advocating for rare interventions. Japan's top currency official, Masato Kanda, emphasized the government's readiness to act against disorderly market movements, yet the currency touched a weekly low of 154.65 per dollar. Analysts from RBC Capital Markets and Bank of America Corp. predict the yen could slide toward 160 per dollar, influenced by the yield gap and Japan's trade deficits.

Market Dynamics and Japan's Economic Challenges

The market dynamics between the yen and the dollar are influenced by various factors, including Treasury yields and the effectiveness of market interventions. The yen's continued depreciation, despite BOJ Governor Kazuo Ueda's efforts to address inflation risks, highlights the challenges ahead for Japan's economy. Japan's reliance on energy imports and a potential rise in crude oil prices could further widen the nation's trade deficit, adding pressure on the yen.

Street Views

  • Ruchir Sharma, Nomura International Plc (Neutral on USD/JPY):

    "The preference for RKOs clearly shows that the market is circumspect about intervention and as such feels that the move higher in USD/JPY will be a grind at best. A slow move higher might also keep the authorities less keen to intervene." "The market is betting that USD/JPY is now stuck in a range with topside capped at 160 by the authorities. This is best expressed by USD/JPY call RKOs and the market is starting to engage in those flows meaningfully."