USD/JPY: Speculations about JPY financing transactions are heating up again
2024-02-29
■ At present, the trading environment for Japanese yen financing is rapidly improving, and the US dollar/Japanese yen may climb to the level of 152 yen at one point.
■ The medium-term forecast still maintains the tone of "slow depreciation of the US dollar and strengthening of the Japanese yen", and rationally observes the background of the rise of the US dollar/yen.
In the PRESTIA Insight report released on February 19th, we mentioned the impact of the new small non-taxable system (NISA) on the depreciation of the Japanese yen, which is a factor contributing to the depreciation of the yen. This time we want to confirm the market trends that are mostly dominated by speculative trading. Overall, we believe that the current yen financing trading environment is rapidly improving, and the US dollar/yen may face certain upward risks in the short term.
According to data from the US Commodity Futures Trading Commission (CFTC) and referencing data from the non-commercial sector, the net short position in the Japanese yen has recently increased to approximately 120000 positions as of February 20, approaching the historical high of approximately 130000 positions set in November last year (151.94 yen). The latter is also the highest level since 2014, which means that the speculative trading of yen bears has reached its limit.
On the other hand, due to the sharp improvement in the yen financing trading environment, speculative traders may further expand their yen short positions in the short term. Usually, conducting yen financing transactions requires three conditions to be met: (1) a high level of interest spread, (2) a decrease in expected volatility, and (3) an increase in investor risk tolerance. As for (1), considering the future situation of Japan and the United States, due to the strong economy of the United States, the market's expectation of early interest rate cuts has weakened. In Japan, due to the statement made by the Vice President of Nippon Bank, Ueda, on February 8th, the possibility of consecutive interest rate hikes after lifting the negative interest rate policy was cancelled. In other words, compared to expectations at the beginning of the year, the high level of the Japan-US interest rate spread is likely to be considered to be maintained for a long time. (2) According to the one-month volatility of the options market, the volatility of the US dollar/Japanese yen is on a downward trend. This month, the US dollar/yen briefly dropped to around 7.1, approaching the lowest point reached in November last year (6.9 units). In addition, the AUD/JPY briefly dropped to around 6.9, reaching its lowest level since June 2021, and the cross-pegging is also quite evident. (3) In terms of stock prices, major countries including Japan have continuously set new historical highs. Investor psychology is improving.
For the mid-term USD/JPY forecast, we still maintain the tone of "slow USD depreciation and strong JPY". This is because in terms of financial policies between Japan and the United States, we believe that the basic direction will not change, that is, the United States will implement interest rate cuts, while Japan will implement interest rate hikes. In the short term, if the US dollar/yen rises to around 152, the Japanese authorities may still be wary of intervention, and the pressure above may continue to exist. However, in the foreign exchange market, a brief overreaction is not uncommon. If yen financing transactions are further favored, in addition to the implementation of actual intervention, it is also necessary to calmly observe whether the rise of the US dollar/yen will temporarily stagnate or enter a sustained upward trend.
*1: Please refer to PRESTIA Insight 2024.02.19 "USD/JPY: Is New NISA a Key to Growth?".
■ The medium-term forecast still maintains the tone of "slow depreciation of the US dollar and strengthening of the Japanese yen", and rationally observes the background of the rise of the US dollar/yen.
In the PRESTIA Insight report released on February 19th, we mentioned the impact of the new small non-taxable system (NISA) on the depreciation of the Japanese yen, which is a factor contributing to the depreciation of the yen. This time we want to confirm the market trends that are mostly dominated by speculative trading. Overall, we believe that the current yen financing trading environment is rapidly improving, and the US dollar/yen may face certain upward risks in the short term.
According to data from the US Commodity Futures Trading Commission (CFTC) and referencing data from the non-commercial sector, the net short position in the Japanese yen has recently increased to approximately 120000 positions as of February 20, approaching the historical high of approximately 130000 positions set in November last year (151.94 yen). The latter is also the highest level since 2014, which means that the speculative trading of yen bears has reached its limit.
On the other hand, due to the sharp improvement in the yen financing trading environment, speculative traders may further expand their yen short positions in the short term. Usually, conducting yen financing transactions requires three conditions to be met: (1) a high level of interest spread, (2) a decrease in expected volatility, and (3) an increase in investor risk tolerance. As for (1), considering the future situation of Japan and the United States, due to the strong economy of the United States, the market's expectation of early interest rate cuts has weakened. In Japan, due to the statement made by the Vice President of Nippon Bank, Ueda, on February 8th, the possibility of consecutive interest rate hikes after lifting the negative interest rate policy was cancelled. In other words, compared to expectations at the beginning of the year, the high level of the Japan-US interest rate spread is likely to be considered to be maintained for a long time. (2) According to the one-month volatility of the options market, the volatility of the US dollar/Japanese yen is on a downward trend. This month, the US dollar/yen briefly dropped to around 7.1, approaching the lowest point reached in November last year (6.9 units). In addition, the AUD/JPY briefly dropped to around 6.9, reaching its lowest level since June 2021, and the cross-pegging is also quite evident. (3) In terms of stock prices, major countries including Japan have continuously set new historical highs. Investor psychology is improving.
For the mid-term USD/JPY forecast, we still maintain the tone of "slow USD depreciation and strong JPY". This is because in terms of financial policies between Japan and the United States, we believe that the basic direction will not change, that is, the United States will implement interest rate cuts, while Japan will implement interest rate hikes. In the short term, if the US dollar/yen rises to around 152, the Japanese authorities may still be wary of intervention, and the pressure above may continue to exist. However, in the foreign exchange market, a brief overreaction is not uncommon. If yen financing transactions are further favored, in addition to the implementation of actual intervention, it is also necessary to calmly observe whether the rise of the US dollar/yen will temporarily stagnate or enter a sustained upward trend.
*1: Please refer to PRESTIA Insight 2024.02.19 "USD/JPY: Is New NISA a Key to Growth?".