Yen vs hedge funds. Forecast as of 01.12.2021

It would seem that Omicron changed the game’s rules, forcing carry traders to turn to funding currencies. The yen has risen sharply. But is the situation so terrible? Let us discuss the Forex outlook and make up a trading plan for USDJPY and GBPJPY.

Weekly yen fundamental analysis

Money rules the world. Forex is not an exception, but a rule. Macroeconomics is just a background for hedge funds and other speculators who use certain strategies. Carry trade has become the most popular among them in the context of global economic recovery. Huge liquidity flows, low borrowing rates, and central banks’ intention to normalize monetary policy created ideal conditions for obtaining cheap money in Europe or Japan and for its subsequent transfer to North America. However, Omicron suddenly emerged.

The Carry Trade was hugely popular in the early days of hedge funds in the 1990s. At that time, the BoJ, seeking to bring the Japanese economy out of stagnation, resorted to ultra-easy monetary policy, while his colleagues from other countries fought high inflation. Just like now, rate hikes with cheap yen-funded loans have allowed the rich to get richer.

Of course, there were some problems. In 1998, hedge fund Tiger Management lost $2 billion in one trading session amid a sharp USDJPY collapse. In 2008, the yen gained 20% against the US dollar, leaving carry traders high and dry. On Black Friday, November 26, the yen’s strengthening against the greenback became the most significant since March 2020. The reason is the flight of traders that speculate in difference to the funding currency after the news about Omicron.

USDJPY dynamics


Source: Wall Street Journal.

The sharp USDJPY sell-off is not surprising, given how heavily hedge funds have gone into the carry trade. Prior to the new COVID-19 variant, hedge funds boosted net yen shorts to their highest levels since the beginning of 2019. This contributed to the growth of the analyzed pair by almost 12% since the beginning of the year.

Dynamics of speculative yen positions


Source: Wall Street Journal.

You have to pay for everything. First of all, for excessive enthusiasm and arrogance. Omicron made the speculators retreat in panic, but it did not change the rules of the game. In the address to the U.S. Congress, Jerome Powell showed little concern about the virus’s potential impact on the U.S. economic recovery. On the contrary, the head of the Fed was determined to continue to normalize monetary policy at an even faster pace than anticipated to combat inflation.

Hedge funds have repeated the old mistake, but the carry trade strategy has every chance of regaining popularity unless Omicron becomes as devastating as the first COVID-19 variant. In my opinion, positive news from vaccine manufacturers and epidemiologists will help reduce the yen’s volatility and return traders’ interest in speculating in difference.

Dynamics of yen volatility

Source: Bloomberg.

Weekly USDJPY and GBPJPY trading plan

The Fed’s firm intention to continue the monetary normalization, the Bank of Japan’s commitment to monetary stimulus, huge flows of cheap liquidity and a gradual decrease in the volatility of major world currencies in Forex give reason to expect a recovery of USDJPY and GBPJPY uptrends. The breakout of the resistances at 114 and 153 will serve as the reason for purchasing the pairs.




Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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