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  • Leveraged funds are very bearish on the Japanese yen (JPY), sharply increasing shorts over the past month or so. Asset managers are also bearish JPY, but to a lesser degree than leveraged funds.
  • USD/JPY has traded between 146 and 151 since 1 February, currently sitting just below the middle of this range. CME Group data on option strikes suggests markets are strongly weighted to USD/JPY downside.
  • The FX volatility curve using CME Group options data suggests investors are calmer than they were throughout 2023, although this sentiment has edged very slightly towards neutral in recent weeks.

At the beginning of the year, USD/JPY rallied just over 7% to trade at its year-to-date (YTD) peak, just below 151. Since then, the pair has fallen just over 2%, currently trading just below the middle of its YTD range. Shifting monetary policy expectations, mostly for the U.S. Federal Reserve (Fed), but also more recently for the Bank of Japan (BoJ), have been the big drivers of these price moves.

Leveraged funds have increased JPY exposure. They have increased short positions by 33,200 contracts since late January, leading to a net-short position of 78,500 contracts (Chart 1). This likely reflects investors conducting FX carry trades. Meanwhile, asset managers have also become slightly more bearish, increasing short exposures by 15,500 contracts to 53,900 (Chart 2). No other currency has seen such a bearish change in positioning over the same period.

Macro Hive take: The key for USD/JPY direction is U.S. yields. Since the pair peaked in mid February, USD/JPY has traded lower with U.S. yields, which also peaked at roughly the same time. We expect USD/JPY to continue trading within its one-month range in the coming weeks. However, volatility could rise with the Fed and BoJ announcing policy updates in the coming days, in addition to important U.S. data releases. 

Option strikes

Investors see USD/JPY downside as much more likely than upside. According to CME Group data on option strikes:

  • There is net demand for USD/JPY calls at 148, with no demand below this level and modest appetite for USD/JPY upside above 148 (Chart 3).
  • In contrast, much bigger clusters of downside demand exist between 146 and 143, in addition to another cluster at 135, with greater notable downside demand in aggregate.

What to watch: The key events are the policy updates from the Fed (20 March) and the BoJ (19 March). Given the importance of U.S. yields for USD/JPY direction, U.S. data releases are also critical. These include PMIs (21 March), consumer confidence (26 March), GDP and PCE (28 and 29 March), and the jobs report (5 April).

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 currently remains at steeper levels than throughout 2023, although in recent days it has edged slightly closer to neutral (Chart 4). This suggests investors remain calm, likely because economic growth has stabilised, and conviction remains that central bank policy easing is coming this year.
  • The move aligns with 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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