(Bloomberg) — Hedge funds are renewing their attack on the yen.
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Days after suspected government intervention to support the currency, leveraged funds are re-entering bets the yen will slump back toward a 34-year low in the coming weeks, according to option traders.
Short-term funds have started buying one- to three-month so-called reverse knock-out call-option contracts this week, which gain in value if the dollar-yen rises. They differ from regular call options in becoming worthless if a specific level is reached, suggesting traders see officials stepping in again soon after a breach of 160 per dollar.
These levels are primarily in the 160.50-161 range, which is above the April 29 high of 160.17, according to traders.
“The preference for RKOs clearly shows that the market is circumspect about intervention and as such feels that the move higher in dollar-yen will be a grind at best,” said Ruchir Sharma, global head of FX option trading at Nomura International Plc in London. “A slow move higher might also keep the authorities less keen to intervene.”
Bearish yen bets highlight the underlying market concern that sticky US inflation will force the Federal Reserve to leave interest rates higher for longer, keeping the yield gap with Japan wide and favoring the dollar. Two suspected rounds of intervention to defend the currency look to have only stemmed its losses, as it gradually drifts back toward a more than three-decade low.
“The market is betting that USD/JPY is now stuck in a range with topside capped at 160 by the authorities,” Sharma said. “This is best expressed by USD/JPY call RKOs and the market is starting to engage in those flows meaningfully.”
The demand for RKOs has narrowed the gap between the put and call option pricing to levels last seen in November, as the cost to protect against the dollar’s rally climbs.
Sharma said it would take a meaningful beat on the US inflation data to accelerate the pace of the dollar-yen’s rise. He sees the currency pair’s downside being limited to around 152 by onshore demand for the greenback from retail investors and importers with real dollar needs.
The yen was little changed at 155.55 per dollar on Thursday. It’s set for a near 2% drop this week after gaining more than 3% the previous week.
(Updates with yen move in last paragraph.)
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