Yen appreciation triggers a major reversal in arbitrage trading? Exchange rate approaches the critical level of 152

Recent global foreign exchange markets are quietly shifting. The USD/JPY exchange rate continues to weaken, with the yen gaining strength, hiding a potential major unwind that could reshape global asset allocations. Hedge funds are increasing bets on a stronger yen, market sentiment is shifting from cautious to bearish, and beneath the calm surface, currents are swirling.

Hedge Funds Increase Yen Bets, Options Market Signals Strong Bearish Outlook

In mid-April, USD/JPY fell to 152.27, declining for four consecutive trading days. The yen’s appreciation is driven by multiple factors: easing concerns over Japan’s fiscal policy, combined with rising expectations of a Bank of Japan rate hike in April, jointly boosting the yen’s value.

The most notable shift is among hedge funds. Amid rising “buy Japan” trades, institutional investors are significantly increasing their bets on yen strength. Data from deposit trust and settlement companies show that the volume of USD/JPY put options with a notional of $100 million or more exceeds call options of the same size by about 50%. Even more telling, the premium spread between options betting on USD/JPY decline and rise over the next month has risen to its highest level since early this month. These details indicate market participants strongly expect the yen to continue appreciating.

Arbitrage Trades Face Reverse Liquidation, Yen Strength Could Trigger Chain Reactions

The real risk of yen appreciation lies in triggering widespread liquidation of arbitrage positions. This isn’t just a market correction but a chain reaction that could cause global asset volatility.

The logic of arbitrage is simple: borrow low-yielding yen to buy dollar assets or US stocks for yield spread profits. But as the yen begins to strengthen, the process reverses—investors need to sell assets and convert back to yen to repay debts. BCA Research warns that the next wave of liquidations will be triggered by two factors: falling asset prices of arbitrage holdings and a rebound in the yen, which reinforce each other, leading to a sharp reversal of yen arbitrage trades.

More concerning is the enormous size of yen arbitrage positions. Once the yen starts appreciating, the large scale of these holdings could cause rapid gains in the yen itself. This would not only push the yen higher but also create a self-reinforcing feedback loop: a stronger yen prompts more liquidations, which in turn drives the yen even higher.

Technical Levels Under Threat, Yen Rebound Could Pressure Tech Stocks

Technical signals are also turning dangerous. USD/JPY has broken below the 100-day moving average. If it continues downward and breaks below the previous low near 152, the next support level is around 150, at the 200-day moving average. Losing this key technical level could signal a larger decline.

The impact on global assets should not be underestimated. Data shows a significant negative correlation between the yen and the Nasdaq 100 index—yen appreciation often coincides with tech sector pressure. If USD/JPY breaches these critical technical levels, tech stocks could face tangible downward pressure.

The current situation presents a complex game: yen appreciation, liquidation of arbitrage positions, asset revaluation. These factors are converging and could brew a major global market upheaval. Investors should remain vigilant about the yen’s trajectory and the risks of arbitrage unwinding.