The short position in Japanese yen suddenly increased significantly! After the decision of the Federal Reserve and the Bank of Japan, traders are betting on

2024-12-23 1380

After the policy meetings of the Federal Reserve and the Bank of Japan raised doubts in the market about the speed at which the US Japan interest rate differential is narrowing, traders are reducing their bets on the rise of the yen.

On Monday morning (December 23) Tokyo time, the Japanese yen fell 0.1% against the US dollar, trading around 156.35.

Prior to the two consecutive meetings held last week, strategists generally believed that 2025 would be a crucial year for the performance of the yen. However, Bank of Japan Governor Kazuo Ueda has indicated that the next rate hike may be postponed, while the Federal Reserve has hinted that the pace of monetary easing will slow down next year. This makes the market less optimistic about the prospects of the Japanese yen.

The indicators of the options market show that after the meeting, traders' bullish sentiment towards the yen fell to its lowest point in a month. According to the latest data from the US Commodity Futures Trading Commission (CFTC) for the week ending December 17, leveraged funds increased their net short position in yen to approximately 44926 contracts, the highest level since July, when macroeconomic volatility disrupted global foreign exchange markets.

Strategists from Mizuho Securities and Sumitomo Mitsui Insurance are among the institutions that have recently made major predictions for the US dollar against the Japanese yen. Mizuho has raised its forecast for the US dollar to Japanese yen exchange rate by the end of 2025 from 130 to 145, while Sumitomo Mitsui Insurance has adjusted its initial forecast from 130 to 140.

We have changed our outlook because the Federal Reserve's stance is extremely hawkish, while the Bank of Japan is very dovish, "said Tsukasa Sugiura, market strategist at Sumitomo Mitsui Insurance." The possibility of the Bank of Japan raising interest rates in January now looks even lower

Last Friday, the Japanese yen fell to 157.93, the lowest level since July. At the post decision press conference on Thursday, Kazuo Ueda stated that he needs more information about Japanese wages and US policies.

Monetary strategists point out that if the Bank of Japan keeps interest rates unchanged until March next year or later, the Japanese yen may face the risk of further weakness. Some people believe that the widening interest rate gap may reignite yen arbitrage trading, a strategy that allows investors to borrow funds from Japan and invest them in higher yielding markets, which has had an impact on global markets this year.

The hawkish tendency of the Federal Reserve and the suspension of the Bank of Japan may provide new arbitrage reasons for yen traders, "said Charu Chanana, Chief Investment Strategist at Saxo Markets. She believes that the timing of the narrowing yield gap between the Federal Reserve and the Bank of Japan has been postponed to after the first quarter, so the appreciation of the yen may also be postponed to the second half of this year

Mizuho's previous forecast for the Japanese yen had predicted that due to the narrowing of the policy interest rate gap and 10-year yield gap between the United States and Japan, the yen would reach levels not seen since early 2023 next year. However, upon seeing the latest monetary policy expectations from the Federal Reserve (implying only two 25 basis point rate cuts next year), Mizuho immediately adjusted its USD/JPY forecast.

Mizuho strategists Masafumi Yamamoto and Masayoshi Mihara wrote in a report, "Currently, given the relatively strong performance of the US economy and high interest rates, the US dollar is likely to remain strong, so we have raised our forecast for the US dollar

In the short term, strategists warn that the USDJPY may touch the level of 160, which will increase the risk of intervention and may even prompt the Bank of Japan to raise interest rates early. Last Friday, Japanese Finance Minister Katsuyuki Kato and foreign exchange manager Junichi Miura both warned that they would take appropriate action against excessive volatility.

Nomura Securities analysts Kyohei Morita and Yujiro Goto wrote in their report, "We believe that the Bank of Japan is more likely to wait until March for additional interest rate hikes

They revised their previous forecast for a rate hike in January and pointed out: "In the short term, there is a higher risk of excessive depreciation of the yen, but we are concerned about any verbal intervention and a possible hawkish shift by the Bank of Japan." Kazuo Ueda is expected to give a speech on Wednesday.

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