Hedge Funds Bet Big on Dollar-Yen Rise, Pushing Currency Pair Towards 165
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Hedge funds are betting big on the dollar-yen's continued rally, with some traders predicting the currency pair could rise as much as 5% in the coming months, reports Bloomberg. This bullish sentiment follows hawkish interest rate decisions by the Federal Reserve and dovish pronouncements by the Bank of Japan last week.
The shift towards a stronger dollar and weaker yen has triggered a surge in speculative trading. According to Bloomberg, trading volume for the dollar-yen currency pair on the Depository Trust & Clearing Corporation surged on December 19, following the central bank announcements, exceeding $23 billion and eclipsing the month's previous high of around $15 billion.
"We have seen hedge funds buying outright USD/JPY calls or digital with a view of the currency pair rising to 160-165 range despite warnings by Japan’s finance minister and the Ministry of Finance," says Mukund Daga, head of FX options for Asia at Barclays Bank Plc, to Bloomberg. The dollar-yen closed Friday at 156.31, and the yen was trading down 0.2% at 156.61.
The trades suggest that many investors believe the divergent monetary policies of the two central banks will continue to support a weaker yen and a stronger dollar. Several of the bullish options trades have maturities extending to the next interest rate decisions by both central banks, scheduled for January.
"USD/JPY topside has seen renewed interest for Q1 '25 on divergence between Fed and BOJ expectations and is supported by the broader dollar strength, and these trades have been expressed via outright digitals as well as leveraged structures which are plays on moderation in spot momentum as it approaches the key level of 160," explains Sagar Sambrani, FX derivatives trader at Nomura International Plc.
The dollar-yen reached a five-month high last week, breaching its November peak and signaling potential for further gains. However, the prospect of intervention by Japanese authorities to stem the yen's slide continues to weigh on sentiment. Japanese officials have repeatedly expressed concern about speculative trading and indicated their willingness to act if necessary.
"The government’s deeply concerned about recent currency moves, including those driven by speculators," said Japanese Finance Minister Katsunobu Kato, on Friday. "We will take appropriate action if there are excessive moves in the currency market."