Market News

(Bloomberg) -- After their bullish yen trades were tested last week, hedge funds have wagered again that the Japanese currency will outperform its major peers in coming months.

So-called macro hedge funds that try to profit from market swings caused by political or economic events have continued to buy yen call options this week against a range of currencies including the dollar, euro and Swiss franc, according to traders.

Yen call options trading volume versus the dollar on the Chicago Mercantile Exchange Group’s options central limit order book was 93% of the total compared with just 7% for put options as of 2:37 p.m. in Hong Kong.

All dollar-yen notional trades of at least $200 million on the Depository Trust & Clearing Corporation on Feb. 20 had strikes at 150 or lower. The currency remained more than 1% stronger this week, even after a slip to around 150.40 versus the greenback on Friday morning in Tokyo after the central bank issued a warning on bond yields.

“The macro community has certainly dipped their toes back into the short dollar-yen, particularly once we broke back through the 200-day moving average at the 152.75 area on the 14th of February but to a far lesser extent,” said Graham Smallshaw, senior FX spot trader at Nomura Singapore Ltd. He has also seen funds look to buy the yen against other currencies.

BOJ rhetoric this week has caused traders to turn their attention back to expectations that interest rates will rise further this year. On Nov. 19, board member Hajime Takata said it’s important for the central bank to continue raising rates “to avoid creating excessively high expectations of continued monetary easing.”

Yesterday in Asia, the market made “a sharp pivot into fresh bullish yen positions both in dollar-yen and in yen crosses,” said Ivan Stamenovic, head of Asia Pacific G-10 FX trading at Bank of America. “For the time being, the majority of interest for yen calls remains tactical and short dated.”

Japan’s inflation rate in January rose to its highest level in two years, giving the BOJ reason to hike more this year. Swap markets are pricing in about an 84% probability that the BOJ will raise its benchmark rate by another 25 basis points by the end of July, with it fully priced in by September.

The yen came under pressure last week from data showing strong US inflation and the prospect of a deal to end the war in Ukraine. Japan’s currency fell as much as 3% versus the euro and dropped more than 2% against the dollar.

“Bullish yen trades were absolutely tested last week on the very nasty dollar-yen squeeze to 154.80 on the 12th of February,” said Smallshaw. “A lot of dollar-yen and cross-yen short trades were wiped out on the move, but we think optionalized structures held in there.”

Besides trades looking for dollar-yen to continue to decline, Smallshaw said longer-dated Swiss franc-yen downside option structures have also been favored, given a possible resolution to the Ukraine crisis that may see long Swiss franc positions unwound.

(Updates CME trading volume in third paragraph)