REFILE-BUZZ-COMMENT-Yen enthusiasts may switch up tactics

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USD/JPY losses might slow after retracing half of its rally from the September 2024 low, which could leave yen bulls in a quandary about how to express their optimism for the Japanese currency.

In such a situation, it might reasonable to expect market participants to replace short USD/JPY cash positions with options.

The reasons for this tactical caution owes partly to the fact that the yen’s 9-big-figure rally this year, coupled with multi-year highs in JGB yields, has sufficiently tightened financial conditions in a way that might spark speculation that BOJ officials could become less hawkish, especially if Japanese data starts to disappoint. Services PPI is due on Tuesday.

Also, market participants might view the yen as increasingly weighed down by stretched positioning. On Friday, the CFTC reported net JPY longs were the highest of the year, as leveraged accounts joined recent real money buying. Positioning in yen futures is also at its highest level since September.

While these factors might slow yen buying, the case for outright sellers is challenged by the fact that the Japanese currency's status as a funding currency has been eroded. Exiting an extended period of BOJ accommodation, along with the yen’s ongoing status as a haven, should keep the currency from falling sharply unless a broader dollar rally ensues.

The pair is currently forming a doji above its December low of 148.65 and the 100-week moving average at 148.55. To unravel a bearish series of lower weekly highs, the pair would need to top 152.60. Large USD/JPY options expiring this week and March event risks should open the door for more volatility ahead.

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