(Bloomberg) -- Traders have piled into hedges against further declines in the Japanese currency and potential intervention by authorities in Tokyo, with open interest for near-dated yen futures contracts hitting a six-year high.
Open interest eclipsed levels seen prior to a series of interventions that took place in late 2022, according to data for Tuesday’s close. With the yen sliding past 150 to the dollar and in danger of slumping to levels last seen in 1990, the nation’s top foreign exchange official said on Wednesday that authorities remain ready to take appropriate steps if needed.
The yen strengthened 0.2% to 150.25 on Thursday after a drop in Treasury yields drove down the greenback. The gain in Japan’s currency was limited as government figures showed the economy slipped into recession, clouding the outlook for an end to the Bank of Japan’s negative-interest-rate policy.
Dollar-yen “will ultimately test and eventually surpass that 2022 high the longer that BOJ liftoff is delayed,” Win Thin and Elias Haddad, strategists at Brown Brothers Harriman & Co., wrote in a research note. That peak was 151.95.
Currency strategists in Tokyo say the next key level for the yen is around 152 per dollar, where officials are likely to go on high alert, but hold off on intervening in the market.
READ: Yen Watchers in Tokyo See 152 to Dollar as Next Level of Concern
The rise in yen positions may in part be driven by speculation over the central bank’s policy. Most open interest in futures is concentrated on the March contract, which will stop trading on March 18, the day when the central bank starts its two-day policy meeting.
One-week risk reversals for dollar-yen held near the highest level since July, indicating diminishing demand for protection against a stronger Japanese currency.
Still, not all indicators point to concerns about yen weakness or the potential for intervention, as longer-dated risk reversals remain yen bullish. Option convexity, a measure of expected outlier movements, is about half of what it was the two other times spot traded above 150.
“The Ministry of Finance is very wary, but it is unlikely to intervene,” said Hideki Shibata, a senior rates and currency strategist at Tokai Tokyo Research Institute. “Even if they could, it would probably be ineffective.”
(Adds strategist comments in fourth and last paragraphs. An earlier version was corrected to fix the scope of open interest.)
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