As Japan prepares for elections, hedge funds strengthen yen selling by resuming carry trades

As volatility eases, hedge funds are once again ramping up carry trade strategies. With Japan approaching an important election this weekend, market positioning adjustments toward the yen are accelerating, and investors seem to be expecting further yen depreciation. Signs of a shift in market sentiment around the dollar-yen exchange rate are emerging.

Bullish Sentiment Indicated by Options Market—Rapid Increase in Call Demand

Data from the options market vividly reflects changing market participants’ expectations. According to Jin10, on Tuesday this week, the trading volume of dollar-yen call options exceeding 100 million dollars surpassed that of put options of the same size. Amid rising expectations for yen weakness, the cost to hedge against a dollar-yen decline one month ahead has fallen to its lowest level in nearly two weeks.

Data provided by the Depository Trust & Clearing Corporation (DTCC) clearly shows this market’s directional bias, highlighting investors’ growing confidence in the dollar’s dominance.

Market Stability Restores Arbitrage and Carry Trades

Anthony Foster, head of G-10 spot trading at Nomura International in London, points out the current market environment’s characteristics. “As volatility stabilizes and the extreme bubbles observed in the precious metals markets are corrected, hedge funds are accelerating their return to arbitrage and carry trade strategies,” he comments.

The revival of carry trade strategies is particularly noteworthy. The appeal of profit opportunities leveraging interest rate differentials is resurging, reflecting a strengthening risk appetite among market participants.

Election Results Could Drive Dollar-Yen Higher

Market consensus views the upcoming Japanese election as a critical turning point. If the election results align with investor expectations, the likelihood of dollar-yen rising to higher levels increases. Foster also states, “If the election results are favorable, the market expects dollar-yen to reach higher levels,” suggesting that post-election policy directions could cause significant fluctuations in the dollar-yen rate.

In the current market environment, the expansion of arbitrage and carry trade opportunities is anticipated, with Japan’s political developments likely serving as a key catalyst for market movements.