Hedge Funds Go Long on Yen as Market Expects Rate Hike
Hedge funds are aggressively going long on the yen, betting that it will break above 150 by year-end and even target the low level of 140. The USD/JPY exchange rate plummeted from above 160 to near 153 within a week, a drop of nearly 5%. This has led to a dramatic realignment in the global forex market.
The most actively traded USD/JPY option on Tuesday was a November put with a strike price of 142.86, according to CME data. The total trading volume of puts expiring before year-end is over three times that of calls. Some traders are using digital options and other spread strategies to target the low 140s.
Graham Smallshaw, Senior Spot FX Trader at Nomura Securities in Singapore, noted that demand has spread to 12-month options. Jerry Minier, Citi's London-based Global Head of G10 Linear FX Trading, emphasized that this is not just a tactical play but a response to an institutional shift in the currency landscape.
The core catalyst behind this surge in the yen is the market's reassessment of the Bank of Japan's rate hike path. The overnight index swaps (OIS) market shows traders have fully priced in a 25-basis-point hike on September 18. Goldman Sachs has sharply brought forward its BOJ hike outlook to September, with the terminal rate target adjusted up to 1.75%.