(Bloomberg) — Yen watchers are pointing to 152 per dollar as the next key level for the beleaguered currency.
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Options positions threaten to accelerate losses for the yen, should it weaken beyond that mark. On the flip side, such a move may also be the trigger for Japanese authorities to intervene to support the currency, strategists say.
Hedge funds are estimated to have trillions of dollars in derivatives that are currently profitable and continue to rise in value the nearer the yen gets to 152 — but evaporate if that barrier is crossed. A selloff in the yen would then be at risk of accelerating as such traders race to cover short dollar-yen positions linked to the original options.
“Fund managers have chosen it as a barrier for their exotic trades as they feel it will be hard for the market to rally past it,” said Ruchir Sharma, global head of FX option trading at Nomura International Plc in London. “The market would be very nervous about spot gapping higher through the barrier.”
Sharma estimates there are several trillion dollars of exotic options maturing in April that have barriers between 152-153.
The yen traded little changed at 151.39 per dollar as of 4:56 pm in Tokyo Thursday, having backed away from 151.97 touched a day earlier that was the weakest since 1990.
The significance of the level to policymakers has already been on display, with warnings from Tokyo of bold action against speculative trading. They kept a low profile Thursday after the nation’s top currency official, Masato Kanda, on Wednesday pledged to take appropriate action against excessive swings in the market. He later said, following a three-way meeting between the finance ministry, the central bank and financial regulator, that speculative moves in markets would not be tolerated.
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“Market perception is they have drawn a line in the sand at 152,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, US. “The key question is their commitment.”
Traders are also on edge given that Japan’s fiscal year is drawing to an end right when many global markets are about to close for Easter, which creates concerns about rapid repositioning and limited liquidity.
Read more: Japanese Markets Face Risks as Fiscal Year-End Falls on Easter
Adding to this, the Federal Reserve’s preferred measure of inflation is due and may fuel the view that US interest rates aren’t likely to come down any time soon, and that would weigh on the yen.
At the same time, a summary of the Bank of Japan’s March 18-19 meeting that was released Thursday indicates Governor Kazuo Ueda and his fellow board members are in favor of taking a slow approach to rate hikes, which may also put pressure on the yen .
(Updates market levels in sixth paragraph)
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