The Japanese elections bring uncertainty, traders turn to short the yen

Options traders are repositioning their yen positions in preparation for political shocks and trade frictions, anticipating that these factors will drive the yen further weaker against the dollar.

On July 14, media reports indicated that the upcoming Japanese Senate elections are becoming the focus of traders. Graham Smallshaw, head of foreign exchange spot trading at Nomura Singapore, stated that there is interest in one-month call option structures that cover the period of the Japanese elections, expecting that the elections may bring significant uncertainty.

Meanwhile, the ongoing uncertainty in US-Japan trade negotiations is further pressuring the yen. According to Xinhua News Agency, Trump announced that starting August 1, he will impose tariffs ranging from 25% to 40% on imports from 14 countries, including Japan and South Korea.

Additionally, the latest US non-farm payroll data has also boosted bullish sentiment for the dollar against the yen. Strong employment data has delayed market expectations for a Federal Reserve rate cut, reigniting interest in summer arbitrage trades.

Election Results May Drive Fiscal Stimulus Expectations

Market expectations that the election results may pave the way for additional fiscal stimulus have begun to push up Japan's long-term yields.

HSBC strategists Paul Mackel and Joey Chew noted in a report that the dollar against the yen is now positively correlated with the 30-year Japanese government bond yields and the steepening of the yield curve.

Bloomberg economist Taro Kimura stated:

"If the market begins to believe that Shigeru Ishiba may step down after the election and starts pricing in a policy shift towards fiscal expansion, this could push up interest rates."

Akira Hoshino, head of Citigroup's Japan market, said:

"Ahead of the Japanese Senate elections, we are seeing some funds increase their long positions in the dollar against the yen. In yen-related currency pairs, the market expects the yen to weaken due to potential election outcomes."

Significant Shift in Options Trading Positions

Reports indicate that trading patterns in the options market are undergoing significant changes.

Data from the Chicago Mercantile Exchange shows that the trading volume of call options for the dollar against the yen on July 11 was more than double that of put options.

This change contrasts with previous data from the Commodity Futures Trading Commission, which showed that as of July 8, asset management companies had a net long position of 89,331 contracts betting on a bullish yen against the dollar.

Some traders are targeting a rebound of the dollar against the yen to the 200-day moving average, which currently stands at 149.71. On Monday during Asian trading hours, the dollar/yen fell 0.13%, reporting at 147.21 at the time of publication.

Smallshaw pointed out that some traders prefer call options with knockout features, such as reverse knockout call options, which are more cost-effective than standard call options because they become invalid when a specific price barrier is reached

Trade Friction Intensifies Yen Pressure, U.S. Employment Data Supports Carry Trade Interest

Mackel and Chew also warned that the lack of progress in U.S.-Japan trade negotiations and fiscal concerns are "worsening market sentiment towards the yen."

The escalation of trade tensions adds additional pressure on the yen, with traders concerned that ongoing trade friction may impact Japan's economic outlook, thereby affecting the yen's exchange rate trends.

Additionally, the latest U.S. non-farm payroll report further stimulated interest in bullish trades on the dollar against the yen.

Smallshaw stated that the report "seems to have triggered a rethinking of the timing of a slowdown in the U.S. economy, delaying the potential interest rate cuts by the Federal Reserve, which in turn has sparked interest in summer carry trades."

Carry trades involve borrowing low-interest currencies (such as the yen) and investing in high-yield currencies (such as the dollar).

Risk Warning and Disclaimer

Markets are risky, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the individual user's specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk