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Hedge Funds Bet Big on USD/JPY Surge Despite Japanese Warnings

Word on the StreetMonday, Dec 23, 2024 4:00 am ET

1min read

In recent developments, leveraged funds have shifted their stance to bullish on the USD/JPY currency pair, establishing positions that predict a 5% rise over the coming months. This change follows policy meetings by the Federal Reserve and the Bank of Japan that raised doubts about the speed of the narrowing interest rate differential between the two nations. Consequently, hedge funds are purchasing bullish options on the USD/JPY.

Despite warnings from Japanese authorities, hedge funds are actively acquiring bullish options, expecting the currency pair could reach the 160-165 range. The USD/JPY ended last Friday at 156.31, and continued to weaken against the dollar.

Numerous traders have been lengthening their bullish option contracts in anticipation of further central bank meetings next January. On December 19, after the demand for call options soared, there was a significant premium drop for hedging downside risks on the currency pair over the next two months.

There's renewed interest in the currency pair's upward trajectory into Q1 2025, driven by divergent expectations from the Federal Reserve and the Bank of Japan as well as the dollar's overall strength.

Some analysts caution that while the dollar may continue to appreciate against the yen, Japanese authorities might intervene to stave off excessive volatility if the yen continues to weaken.

The prospects for yen strength have dimmed as Bank of Japan's Governor Ueda indicates a delay in rate hikes, contrasting the Federal Reserve's hint at slower easing next year. Given the market dynamics, traders are increasingly skeptical of the yen's outlook.

The yen's drop to a five-month low against the dollar has prompted some strategists to adjust their yen forecasts. The future of the yen also hinges on whether Japan maintains its interest rates beyond March, a situation some fear could reignite carry trades.

Despite the strong influences driving the currency, caution persists around potential Japanese government intervention, highlighted by recent statements from Japanese officials regarding their concern over exchange rate speculation.

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