Hedge Funds Flip to Bullish on Yen Even After Strong US Payrolls

Hedge funds are reversing course and ramping up bets on a stronger yen as the buy Japan trade takes hold even after curbed expectations for Federal Reserve rate cuts this year, according to traders.

The currency rose for a third day against the greenback Wednesday, shrugging off upward pressure on the dollar after the employment report. As recently as last week, hedge funds were rebuilding short yen positions ahead of Japan’s pivotal election, bracing for renewed weakness on expectations Prime Minister Sanae Takaichi would win a to pursue expansionary fiscal policy.

Trading volume in dollar-yen put contracts of $100 million or more was about 50% higher than comparable call options on Wednesday, according to Depository Trust & Clearing Corporation data . A put gains in value if the pair declines while a call becomes worth more if it advances. The premium to hedge or speculate on the pair falling, versus rising, over the next month climbed to its highest level since Feb. 2.

“Hedge fund sentiment has changed and we’re seeing more interest to buy downside in dollar-yen,” said Antony Foster , head of G-10 spot trading at Nomura International Plc, adding there was also demand to buy the yen against currencies including the Australian dollar and Swiss franc.

“The sentiment is akin to buying the Nikkei, buying Japanese stability and therefore buying the yen,” London-based Foster said.

Japan’s currency initially came under pressure after the Liberal Democratic Party’s decisive election victory, but quickly rebounded after Japanese Finance Minister Satsuki Katayama the government would respond to FX moves in line with the US-Japan joint statement.

The yen’s rebound coincided with the unwinding of short-term bullish dollar-yen positions ahead of the US employment report, with both hedge funds and asset managers selling the pair, according to Nathan Swami , Citigroup’s Singapore-based head of FX trading for Asia Pacific.

Positioning in currency options markets also turned bearish on dollar-yen with hedge funds seen buying short-term dollar-yen put spreads on Wednesday ahead of the US jobs data, other traders said .

“Option demand for dollar puts remains intact and risk reversals remain strongly bid for downside,” Swami said prior to the release of US payrolls. Risk reversals compare the price of similar call and put options.