Hedge funds are shrugging off warnings of yen intervention, placing bets in the currency options market that the Japanese currency could slide to around 165 per dollar before authorities step in. Following the yen's decline to an 18-month low against the dollar, Japan's Finance Minister and top currency official issued fresh warnings on Wednesday. Market expectations for further dollar-yen gains intensified after Prime Minister Sanae Takaichi's plan for an early election, with investors believing that a majority win for the Liberal Democratic Party would strengthen its power to pursue expansionary policies. The dollar-yen pair closed down 0.4% on Wednesday at 158.46. "The demand from hedge funds for structures that benefit from a stronger dollar/yen persists; we are seeing steady growth in both outright option buying and leveraged structure purchases, as they anticipate the central bank might intervene in the 160-165 range," said Sagar Sambrani, a senior FX options trader at Nomura International in London. Data from the Depository Trust and Clearing Corp. showed that on Wednesday, the trading volume of call options—which profit when the currency pair rises—was more than double that of put options—which profit when it falls—among trades with a notional value of $100 million or more. This imbalance highlights the market's bullish bias on the currency pair. The rapid ascent of the dollar-yen exchange rate and the threat of Japanese government intervention have prompted some investors to buy put options for both hedging and speculative purposes. Japan's last intervention lasted two days, with the dollar-yen rate falling 2.6% from its peak of 161.76 on the first day. "Some investors are seeking short-term downside protection due to concerns that the government might intervene," said Mukund Daga, Global Head of FX Options at Barclays.
Comments