Hedge funds have begun to bet that the yen will break out of its narrow trading range and rise against the US dollar.
Data from the Chicago Mercantile Exchange shows that leveraged investors are building positions in the options market. If the yen breaks out of its current narrow trading range of around 147 against the US dollar and rises above 145, these investors will benefit.
There are many factors that could lead to the appreciation of the Japanese yen against the US dollar. These include US President Donald Trump’s attempt to fire Federal Reserve governor Lisa Cook, which could force the Fed to cut interest rates. In addition, political unrest in France may also increase the demand for the yen as a safe haven, while this week’s weak US non-farm payroll data may also boost bets on the Fed’s easing policy.
Mukund Daga, head of Asian foreign exchange options at Barclays in Singapore, said, “Following a series of news reports, including the possibility of a no-confidence vote in France and the spat between Trump and Lisa Cook, we are finally seeing some interest from certain parts of the hedge fund community in holding downside options on the dollar/yen.”
Data from the Chicago Mercantile Exchange shows that on August 26, after the dispute between Trump and Cook and France’s announcement of a vote of no confidence, the trading volume of put options on the US dollar against the Japanese yen was four times that of call options.
The most actively traded September-expiring put option on the day had a strike price of 144.93 (the fixed price at which the put option holder can sell the USD/JPY). As the currency pair fell below the strike price, the value of the put option rose. The USD/JPY closed at 147.05 on Friday.
Barclays is not the only bank to have seen a resurgence in demand for options on the dollar against the yen.
Graham Smallshaw, a senior spot foreign exchange trader at Nomura Singapore, said: “Since Powell’s speech at Jackson Hole, we have seen the USD/JPY mostly trending downward.”
He said: “The ‘quick money’ group has started to position again in the downward structure of the USD/JPY, especially holding one to two-month options in the form of digital put options and direct put options.” A digital put option refers to a strategy that provides a fixed payout if the currency pair falls below a predetermined level at expiration.
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