- Leveraged funds remain bearish the Japanese yen, albeit less so than in December. Asset managers have flipped from bullish to bearish, although positioning is much smaller than with leveraged funds.
- Despite the yen falling versus the U.S. dollar in 2024, we think further material upside in USD/JPY appears unlikely. USD/JPY trades at 146.80, just above the middle of the 140-152 trading range seen since early November. Exceeding the top of this range will be challenging. CME Group data on option strikes suggests markets are weighted to USD/JPY downside over upside.
- The FX volatility curve using CME Group options data suggests investors are the most risk-positive they have been since November.
The Japanese yen (6J) strengthened sharply from early November to late December, with USD/JPY falling from a high just below 152 to a low just above 140. A concurrent decline in U.S. yields drove the move. Since bottoming on 28 December, USD/JPY has bounced to 148, correcting higher together with the U.S. 10-year yield.
Leveraged funds have materially decreased JPY exposure, reducing their short positioning by 43%. They have closed 27.3k short positions since December, leading to a net-short position of 35.0k contracts (Chart 1). This short position is the biggest among the yen’s six peer currencies.
Meanwhile, asset managers have turned from bullish to bearish. Although positioning is much lighter compared with leveraged funds, asset managers have flipped their exposures from 17.8k contracts long last month to the current 4.9k contracts short (Chart 2). Only the Canadian dollar (6C) and Japanese yen saw positioning reversals since December.
Macro Hive take: The key to the direction for USD/JPY has been U.S. yields. As yields declined in November and December, so did USD/JPY, with the currency pair recovering as U.S. yields have moved off the recent lows. We expect two-way price action in the U.S. rates market ahead, with similar dynamics in USD/JPY. Given the sensitivity of Japanese officials to sustained yen weakness, and the possibility of FX intervention (certainly verbal and perhaps by buying JPY), further upside in USD/JPY is probably limited to 152-154, as the analysis of options strikes below suggests.
Option strikes
Investors see USD/JPY downside as more likely than upside. According to CME Group data on option strikes:
- There is net demand for USD/JPY calls from 146 to 152, with more at 154 (Chart 3). However, net demand quickly weakens thereafter.
- In contrast, there are bigger clusters of downside demand between 135 and 145, with the standout bearish position at 139. That is a 6% decline from current levels.
What to watch: With U.S. yields driving USD/JPY, key U.S. data releases will influence price action in the U.S. rates market (and therefore USD/JPY). U.S. jobs data on 2 February will be important, as will the CPI data on 13 February, PPI data on 16 February and PCE data on 29 February. Weaker readings from any of these releases will probably drag U.S. yields lower and weigh on USD/JPY. Meanwhile, stronger readings would have the opposite impact.
FX investor risk appetite
CME Group has a range of FX volatility data to help investors track the level of volatility. We can also use FX volatility data to determine investor risk appetite. We find the shape of the FX volatility curve useful in this regard. When shorter-dated FX implied volatility is higher than longer-dated volatility, this suggests investors are worried or in panic mode. In contrast, when shorter-dated FX volatility is lower than longer-dated volatility, this suggests investors expect calm markets. The latest data finds:
- The FX volatility curve has flattened through 2024 to levels not seen since November (Chart 4). This suggests investors are calmer, likely because economic growth has stabilised and there is greater clarity on incoming central bank easing.
- The move aligns with the CME Group CVOL volatility indices, which have followed a similar dynamic to trade near year lows.
- Outside FX, equity volatility remains historically low, while rates volatility remains historically high.
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