Bullish sentiment prevails as trading volume of the Japanese yen reaches a new high this year.

As the first and second in command of the Bank of Japan "release the hawks," the Japanese yen has strengthened significantly, with trading volume reaching a new high for the year.

On Thursday, December 7th, the trading volume of the yen on the Chicago Mercantile Exchange reached a staggering $74.8 billion, the highest level since 2023. This includes a total of $39.4 billion in futures contracts and $4.2 billion in options.

As mentioned by Wall Street News earlier, on Thursday morning, Bank of Japan Governor Haruhiko Kuroda stated in a parliamentary speech, "Dealing with monetary policy issues at the end of the year and into next year will become more difficult. If we raise interest rates, there are multiple options available to adjust policy rates." This statement has intensified speculation in the market about a shift in policy direction.

Just the day before, Bank of Japan Deputy Governor Masayoshi Amamiya hinted that the Bank of Japan may soon end the world's last negative interest rate policy, making it the most explicit signal from the Bank of Japan leadership to date.

On December 7th, the market's probability of the Bank of Japan ending negative interest rates this month soared from 2% to 45%, driving a sharp rise in the yen. The USD/JPY fell 2.18% to close at 144.08, marking the largest increase in the yen in nearly a year. According to data from the Chicago Mercantile Exchange, the significant strengthening of the yen has pushed the cost of USD/JPY options to the highest level since July.

On December 8th, due to the unexpectedly strong US labor market, the market lowered its expectations of a rate cut by the Federal Reserve in 2024. The yen's upward momentum slowed, and the US dollar index rose by more than 0.2% to 104.24.

On Friday, the volatility of USD/JPY options for the next two weeks (an indicator of the demand for a derivative instrument expiring within two weeks) reversed, with the implied volatility of USD/JPY put options exceeding that of call options by 2.31%. This indicates that the market expects a significant increase in the yen in the next two weeks, approaching the year's high of 2.86% set on July 27th, and the bullish sentiment towards the yen is close to the highest level in over four months.

Analysts Derek Halpenny and Lee Hardman from Mitsubishi UFJ Financial Group believe that if the US dollar continues to strengthen, the yen will weaken. However, the extent of the yen's rebound may be limited due to the existence of short positions on the yen in the market:

Our previously established short position on USD/JPY has reached the target profit level, so we have now established a long position on EUR/JPY. The Bank of Japan's actions next week may have a greater negative impact on the euro.

Ikue Saito, an analyst at JPMorgan, stated that if the Bank of Japan does not take any policy measures at its December meeting, the yen may fall again, and the extent of the fall will depend on the communication between the Bank of Japan and the market. If the Bank of Japan manages to suppress expectations of further interest rate hikes after exiting the negative interest rate policy, forward interest rates will be significantly repriced and the USD/JPY will rebound significantly.

Bank of America stated that even in the event of discussions about interest rate hike options by the "top two" officials of the Bank of Japan, they still maintain their expectation of the USD/JPY exchange rate at 155 in the first quarter of 2024, and it is expected to rise to 142 by the end of 2024.