Hedge funds are increasing bets on the Japanese yen strengthening, with options positioning suggesting a dollar-yen rate below 150 by the end of the year and potentially reaching 140 in longer-term trades. Data from the CME Group indicates that November put options with a strike price of 142.86 were the most active contracts on Tuesday.
The volume of put options expiring by year-end exceeds call options by more than three to one. The dollar-yen pair declined by nearly 5% in the week leading up to Tuesday. Just three weeks prior, the pair traded near 159, while Japanese investors had net purchased over ¥5 trillion in foreign assets during the two weeks ending August 15.
The shift in market sentiment follows hawkish signals from Bank of Japan Governor Kazuo Ueda and board member Hajime Takata. The currency pair dropped below the 155 level and traded near 153.44 on Wednesday. Nomura reports that macro funds are currently focusing on the 150 to 152 range for the dollar-yen exchange rate.
A stronger yen increases repayment costs for investors who utilized yen-denominated loans to fund crypto positions. Rising Japanese bond yields further reduce the incentive for carry trades. Market participants are now awaiting the Bank of Japan's decision in September to see if the central bank validates current market expectations.
