The US and Japanese central banks are again at odds, and hedge funds are going crazy buying the US dollar against the Japanese yen!

With the recent interest rate decisions made by the Bank of Japan and the Federal Reserve last week, the popularity of the yen has been dampened, leading leveraged funds to turn bullish on the USD/JPY pair, buying positions with expectations that the currency pair will rise by 5% in the coming months.

According to Bloomberg, on December 19, the trading volume of USD/JPY exceeded $23 billion at the Depository Trust & Clearing Corporation (DTCC), far surpassing the previous record of about $15 billion set earlier this month. As of 2 PM today, USD/JPY remains the most active currency pair in DTCC options trading.

Mukund Daga, head of Asian foreign exchange options at Barclays Bank in Singapore, stated:

"Despite warnings from the Japanese Finance Minister and the Ministry of Finance, we still see hedge funds buying bullish options or digital options on USD/JPY, expecting the exchange rate to rise to the 160-165 range."

Last Friday, USD/JPY closed at 156.31 and is currently at 156.75.

According to several traders, many bullish options contracts cover the next interest rate decisions of the two central banks in January next year. On December 19, due to a surge in demand for bullish options, the premium for hedging the downside risk of this currency pair (relative to the upside risk) recorded the largest decline in three months. Hedge funds in Asia and Europe have been buying these bullish options.

Sagar Sambrani, a foreign exchange derivatives trader at Nomura International in London, believes that due to the divergence in expectations between the Federal Reserve and the Bank of Japan, coupled with the overall strengthening of the dollar, renewed interest in the market for the first quarter of 2025 has emerged, manifested through digital options and leveraged structures.

Last week, USD/JPY rose to a five-month high after breaking the November peak, opening up space for further increases.

However, some analysts point out that if the yen continues to depreciate, funds need to be wary of the risk of potential intervention by Japanese authorities. Japanese Finance Minister Kato Katsunobu warned last week:

"The government is deeply concerned about recent currency movements, including those driven by speculators. If excessive volatility occurs in the currency market, we will take appropriate action."

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