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  • Leveraged funds are very bearish against the Japanese yen (JPY), albeit slightly less so than last month. Asset managers are also bearish JPY, but to a lesser degree than leveraged funds.
  • Throughout most of 2024, USD/JPY rallied sharply before suspected yen purchases by Japanese officials halted the ascent. Since this intervention, USD/JPY has traded between ~152 and ~160, now sitting roughly in the middle. CME Group data on option strikes suggests markets are strongly weighted to buying dips in USD/JPY.
  • The FX volatility curve using CME Group options data suggests investors are relatively calm, albeit slightly less so than in February.

From early January to late April, USD/JPY rallied from about 140 to just above 160, or roughly 14%. However, suspected intervention stopped the rally in its tracks, with the Japanese Ministry of Finance (MoF) most likely purchasing trillions of JPY in the open market. USD/JPY currently sits in the middle of the ~152/~160 range in which the pair has traded since the probable intervention.

Leveraged funds are still materially short JPY, although slightly less than last month. Net shorts now sit at -81.3K contracts, down slightly from the -83.3K in early April. This short position is still comfortably the largest of all currencies for leveraged funds (Chart 1). Beyond JPY, leveraged funds are bearish EUR, and have greatly increased CHF shorts while flipping from bullish to bearish GBP.

Meanwhile, asset managers have also become slightly less bearish, decreasing short JPY exposures to -66.2K contracts from -69.0K in early April (Chart 2). They remain very bullish EUR (although less than in April) and have increased bearish GBP bets while becoming more bearish CHF and CAD.

Macro Hive Take: Before the suspected MoF intervention, the biggest driver of USD/JPY upside had been interest rate differentials, with carry favoring the USD over the JPY. While these rate dynamics are still at play, fear of further MoF intervention likely limits USD/JPY upside. We expect further downside.

Option strikes

Investors see USD/JPY downside as much more likely than upside but seem keen to buy into that dip. According to CME Group data on option strikes:

  • There is net demand for USD/JPY calls intermittently between 150 and 153, with larger demand between 145 and 148 and another good-sized cluster at ~141 (Chart 3).

  •  In contrast, there is demand for USD/JPY puts between 157 and 160, and some additionally near 165, but these are much smaller than the demand for calls at lower strike prices.

What to Watch: Looking ahead, the next Fed (on June 12) and BoJ (on June 14) rate decisions loom large. Before these important meetings, in the U.S. watch out for the FOMC minutes (May 22), U.S. PMI data (May 28) and PCE readings (May 30 and 31). In Japan, we will be watching trade data (May 22), inflation readings (May 24) and industrial production (May 31).

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 stabilized and conviction remains that easier central bank policy is coming this year.

  • The move aligns with CME Group’s 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.

The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.


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