TOKYO: Trading in the Japanese yen surged to its busiest this year after comments by Bank of Japan (BoJ) governor Kazuo Ueda triggered speculation of a near-term policy shift.
CME Group Inc, the world’s largest regulated foreign-exchange marketplace, traded US$74.8bil in the Japanese currency last Thursday, the highest volume for 2023.
That included a total of US$39.4bil worth of futures contracts and US$4.2bil of options.
The yen jumped almost 4% in New York trading on Thursday following commentary from Ueda and one of his deputies that traders interpreted as a signal pointing toward the end of the bank’s negative rates regime. It jolted global financial markets, strengthening the yen against all of its peers in the Group-of-10 currencies.
The sharp gains in the yen propelled the cost of dollar-yen options to their most expensive level since July, according to the CME. One-week volatility in the currency pair hit the highest level in over four months.
Two-week dollar-yen risk reversals, which span the upcoming BoJ rate decision, traded on Friday near 2.31% puts over calls, indicating the market is anticipating a decent amount of yen gains over the next two weeks.
That compares with a year-to-date record of 2.86% reached on July 27 and suggests bullishness toward the yen is near the highest in more than four months.
The yen pared its rally after strong US labour market data drove traders to dial back some of their rate-cuts bets for next year. The Bloomberg Spot Dollar Index gained more than 0.2% last Friday, putting it on pace for its first weekly advance in four weeks.If the dollar recovers, the yen will weaken “but the weight of short yen positioning that likely still exists following the move this week will probably limit the scale of any yen retracement weaker,” analysts at MUFG Bank wrote.
“Our profit target level in our short US dollar and yen trade was hit,” analysts including Derek Halpenny and Lee Hardman wrote.
“We have re-established a long yen position this time against euro ahead of next week’s central bank meetings which may prove more negative for euro.”
The Federal Reserve will decide on rates next week as well as the European Central Bank and the BoJ.
Bank of America strategists expect Japan to end its negative interest-rate policy in January or by April the latest.
If no policy moves occur at the BoJ’s next meeting, the yen is likely to retreat again, though the degree will depend on the post-decision communications, according to Ikue Saito, an analyst at JPMorgan Securities Japan Co.
If BoJ manages to dampen expectations for further rate hikes after it exits the negative interest-rate policy, “then there would be sharp re-pricing in both front-end forward rates and a big rebound in US dollar and yen,” she added. — Bloomberg