Arbitrage Position Closing Risks Rise! Yen Rally Accelerates: Breaking Above 155 Triggers Stop-loss Orders, 152 Zone Becomes Next Target

According to Zhitong Finance APP, the yen has triggered stop-loss orders after breaking through the 155 level against the US dollar and is now approaching its highest level this year, with the 152 area becoming the focal point for traders. On Tuesday, the yen rose by 0.4% to 153.80, following a 1.2% gain overnight, with a cumulative increase of nearly 4% this month, making it the best-performing currency among the G10 currencies. According to a trader familiar with the situation who requested anonymity, the drop of the USD/JPY exchange rate below 155 triggered a significant number of stop-loss orders and forced options dealers to sell dollars.

The current move in the yen is not driven by a single factor. Some traders point to weak market liquidity before and after the US holiday, while others believe that the yen’s breakthrough of 155 accelerated an existing upward trend. Last week, the yen started to strengthen as expectations for a Bank of Japan rate hike increased, leading to a sharp reversal in market sentiment. In addition, speculation about asset allocation adjustments by Japan’s government pension investment fund has also supported the yen’s exchange rate.

Rodrigo Catril, strategist at National Australia Bank, stated: “Overnight, breaking below the support area clearly opened the door for further declines. USD/JPY is likely to test previous lows near 152.27 and 152.10.”

The 152.10 area represents the strongest level for the yen against the dollar so far this year, and as upward momentum builds, the importance of this range is becoming increasingly prominent. Technical indicators also suggest that after dropping below support near 155, 152 may be the next target.

Analysis indicates that foreign exchange traders are now turning their attention to the next threshold for USD/JPY, and as downward momentum strengthens, the 152 area may be a candidate target. Motonari Sakai, head of FX trading at Mitsubishi UFJ Trust and Banking, stated that if the yen surpasses the 154 low, the next target is likely to be the 152 yen range.

The improvement in the yen's performance is also being confirmed by the options market. Despite the US holiday on Monday, global FX contract volumes remained substantial, with yen crosses being particularly active. The surge in one-year yen forward contracts highlights the scale of yen short-covering, which is currently taking place against the euro, pound, and Swiss franc. This will further increase downward pressure on the USD/JPY pair.

The speed of this move has raised concerns about the possibility of wider-scale unwinding of yen-funded carry trades, in which investors borrow yen at low cost to invest in higher-yielding assets elsewhere.

Rinto Maruyama, senior rates and FX strategist at SMBC Nikko Securities, noted: “Our base view is that a break below 154 by the yen may trigger further unwinding of yen carry trades and more stop-loss orders, leaving room for further appreciation of the yen.” He added that reduced open positions also mean investors have an opportunity to re-establish yen shorts.

Data show that the yen has experienced a decline of more than 1% against high-yielding currencies such as the Brazilian Real and the South African Rand. A senior FX options trader at Nomura Securities pointed out, “The era of easy carry trades is over, and the scale of cross-border capital flows from Japan to the US may have seen a substantial change.”

The current market focus is shifting to Friday's US CPI data, which could provide clues on the Federal Reserve’s policy outlook. In Japan, investors will closely watch the speech by Bank of Japan board member Hajime Takata for indications of future rate hikes. Previously, Takata explicitly stated that the magnitude of future rate hikes would not be rigidly capped at 25 basis points and that back-to-back hikes under normal circumstances were possible. This statement comes only three months after the June rate hike—if another hike occurs on September 18, it would mark the fastest tightening pace under Kazuo Ueda's tenure.

A bigger test is next week’s Bank of Japan policy meeting. Overnight index swap markets imply a 97% probability of a 25 basis point rate hike, which raises the bar for policymakers to send a sufficiently hawkish signal to sustain yen appreciation.

Catril said: “The yen is at a crossroads. A rate hike next week is a necessary condition, but to maintain the yen’s recent rally, the Bank of Japan needs to send a hawkish signal and reiterate market expectations that the likelihood of another hike before year-end is greater than no hike.”