Ignoring strong non-farm payrolls! Hedge funds turn around and go long on Japan, heavily betting on the yen's appreciation

Reuters Finance App has learned that, according to traders, although strong US employment data weakened market expectations for a Federal Reserve rate cut this year, the “long Japan” trade continues to heat up, prompting hedge funds to reverse their positions and heavily bet on a strengthening yen.

On Wednesday, the yen rose against the dollar for the third consecutive day, completely ignoring the dollar’s upward pressure caused by the US employment report. Just last week, hedge funds had increased their short yen positions ahead of Japan’s key elections, with the market widely expecting that Prime Minister Sanae Takamiya, if elected and granted a new mandate, would implement expansionary fiscal policies, potentially weakening the yen again.

Data from the US Depository Trust & Clearing Corporation shows that on Wednesday, the trading volume of dollar-yen put options worth $100 million or more was about 50% higher than comparable call options. Currently, the premium paid to hedge or bet on a weaker dollar against the yen over the next month has risen to its highest level since February 2.

Antony Foster, head of G10 spot trading at Nomura International, said, “Hedge fund sentiment has shifted; more and more funds are buying dollar-yen downside positions.” He added that funds are also buying yen, with buying interest seen in currencies like the Australian dollar and Swiss franc.

This London-based trader said, “This sentiment is like buying the Nikkei index, betting on the stability of the Japanese economy, which ultimately manifests as buying yen.”

After the Liberal Democratic Party’s landslide victory in the election, the yen was initially under pressure, but then Japanese Finance Minister Shigeyuki Katayama stated that the Japanese government would respond to foreign exchange fluctuations based on the US-Japan joint statement, and the yen quickly rebounded.

Nathan Swami, head of Asia-Pacific FX trading at Citigroup in Singapore, pointed out that as the yen rebounded, the market was unwinding short-term dollar-yen long positions ahead of the US employment data release, with hedge funds and asset managers selling the currency pair.

Other traders said that the foreign exchange options market also shifted to a bearish stance on the dollar-yen. Before the US non-farm payroll data was released on Wednesday, hedge funds had already bought short-term dollar-yen put spread options.

Swami stated before the US non-farm payroll release, “The buying of dollar put options remains strong, and the risk reversal indicator (which measures the price difference between similar call and put options) also strongly indicates dollar weakness.”