Hedge funds join $20bn in options market bets on yen rally amid Fed dovish turn

Currency traders are betting in spades that the yen will re-visit levels last seen during this year’s flash move, as the Federal Reserve’s dovish turn upends the King Dollar trend.
Options placed since last week’s Fed meeting that will pay out on a yen rally now total more than $20bn in notional value, including over $3bn on the yen hitting the 105 per dollar level seen in January, according to data from the Depository Trust & Clearing Corporation. Hedge funds and longer-term macro funds are raising their exposure to yen strength, according to traders.
The yen’s rally is gaining momentum ahead of the Group of 20 meeting in Japan later this week, where direction for the dollar is likely be driven by a meeting between the leaders of the US and China on their trade feud. Analysts point to the re-emergence of the yen as a haven trade and policy divergence as reasons to bet on further yen strength.
“We are short dollar-yen targeting 105 by the end of July,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA. “Global growth is slowing and the Fed has significantly more capacity to respond to slower domestic growth than the BoJ, which is already pulling at monetary-policy strings. In turn, this should continue to drive the recent convergence between the dollar rates and yen rates, triggering the unwinding of dollar carry trades.”
Since the Fed meeting on June 19, there have been 50% more yen calls placed than puts, according to the DTCC data. Options trades in the over-the-counter market are in the form of dollar put spreads and one-touch structures that would profit from the yen hitting 105 from anywhere between one week and three months’ time, said two Europe-based traders, who asked not to be named because they are not authorised to speak publicly.
The yen was up 0.2% to 107.08 yen per dollar as of 1.25pm in London yesterday, after breaking through 107 earlier in the day to the highest since the January 3 flash move. Its total gain versus the US currency since the Fed decision is nearly 1%.
The surge prompted an emergency meeting last week of officials from the Bank of Japan, the Japan’s finance ministry and financial regulator.
Some options traders are going for an even bigger yen rally to 100 or lower, a level last breached in 2016.