On the eve of the US-Japan negotiations, hedge funds go long for yen

Source: Wall Street News

The yen bulls are back, and Wall Street is betting on the appreciation of the yen.

On May 19, Bloomberg reported that on the eve of negotiations between the U.S. and Japan's finance ministers this week, hedge funds and long-term investors are re-establishing positions betting on the appreciation of the yen, hitting a five-year high, and the options market also shows investors' expectations of the appreciation of the yen.

Antony Foster, head of G10 currency trading at Nomura International in London, said speculation that Japan may discuss exchange rates during tariff negotiations, attracting yen buyers to return, and hedge funds and longer-term investment institutions have begun selling USD/JPY and other yen cross-currency pairs.

According to reports, Japanese Finance Minister Kato Katsunobu said on May 16 that he will seek opportunities to hold exchange rate dialogue with US Treasury Secretary Besent this week. According to Global Network, Japan and the United States plan to hold the third round of Japan-US tariff negotiations after the G7 Finance Ministers and Central Bank Governors meeting held in Canada this week.

In early Asian trading today, the US dollar/yen fell 0.6% to 144.81, partly due to Moody's downgrade of the U.S. credit rating, triggering a decline in the U.S. dollar.

Tariff negotiations discuss exchange rate expectations trigger market repositioning

The yen has strengthened significantly after last week's talk on exchange rate issues. Katsushiro Kato further boosted investors' expectations of betting on the appreciation of the yen.

First, hedge funds go long for yen. According to the Commodity Futures Trading Commission (CFTC) data, leveraged funds held 24,741 long yen contracts in the week ended May 13, the largest scale since September 2019.

The options market shows strong signals from the yen. Nomura International also noticed the rising interest in the yen strengthening trading in the options market. Sagar Sambrani, a senior forex options trader in London, said:

The implicit volatility in the forex market had fallen to pre-liberation day levels earlier last week, but the decline was strongly bought by our customers, who targeted the strengthening structure of the yen.

The U.S. dollar/yen risk reversal indicator (a indicator similar to the bullish and put options price) shows that the hedging price for the downside risk of the currency pair has risen last week as more bearish bets are formed on the currency pair.

Tan Teck Leng, Asia Pacific Forex and Macro Strategist at UBS Global Wealth Management's Chief Investment Office, said the UBS Global Wealth Management risk reversal indicator shows that the recent increase in demand for U.S. dollars/yen put options may be due to South Korea's remarks about discussing currency issues with the United States.

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