Hedge Funds Are Betting Yen Will Slide to 160 by Year’s End

Hedge funds are betting the yen will weaken to as low as 160 per dollar by the end of the year, driven by changing approaches to interest rates from the Federal Reserve and the Bank of Japan.

Trading in call options that profit if the dollar strengthens against the yen surged on Thursday. Calls with a notional value of $150 million or more were traded six times more than puts, which benefit if the dollar falls, data from the Depository Trust & Clearing Corporation showed.

The dollar climbed Thursday to its strongest level against the yen since February. The BOJ kept its key interest rate unchanged and gave few hints about when it might raise rates again. Traders now see about a 45% chance of a quarter-point rate hike in December, but don’t fully expect the increase until around March or April. In contrast, while the Fed cut rates on Wednesday, Chairman Jerome Powell cautioned that another cut in December isn’t guaranteed.

The differing stances have macro hedge funds, which look to profit from broad market swings caused by political or economic events, looking for a dollar-yen “glide path for 157 in a month and 158-160 by year-end,” said Sagar Sambrani, a senior foreign-exchange options trader at Nomura International Plc in London. On Friday, the yen traded in a range of 153.65 to 154.17 versus the greenback.

“This trade has been well subscribed by our macro franchise mostly via digitals given realized volatility is holding up well,” he said. “We’ve also seen RKO structures to cheapen the premium expecting potential central bank intervention closer to the key level of 160.”

Reverse knock-out options, or RKOs, are more cost-effective than standard call options because they expire worthless if a specific price barrier is breached. A digital option refers to a strategy that offers a fixed payout if the currency pair passes a predetermined level when it expires.

Option traders aren’t alone in seeing potential for the dollar-yen to hit 160. Amundi said the dollar-yen could potentially trade in a range , should the pair break past 155.

Thomas Bureau , global co-head of FX option trading at Societe Generale SA, also saw a pickup in demand for the cheaper dollar-yen option contracts that included knockout clauses.

Knock-out options with maturities around one month “remain the preferred choice for tactical, short-term protection,” he said.