Driven by the expectation of narrowing US-Japan interest rate differentials and capital inflows, the carry trade of shorting the Japanese yen has experienced a major turnaround. In the past half month, the Japanese yen has risen by more than 5% against the US dollar, triggering global asset price fluctuations.
On Thursday local time, analysts such as Patrick R Locke from JPMorgan Chase released a report stating that on July 24th, there was a net downward demand of 1.2 standard deviations in the USD/JPY options market. The net demand for put options was 1.2 standard deviations above the average level, indicating an increase in market bullish sentiment towards the Japanese yen.
On July 24th, the trading volume of USD/JPY put options was unusually high, reaching 2-3 standard deviations, while the trading volume of call options was also above average, to some extent diluting the indicator of net downward demand. In addition, cross-yen trades, such as AUD/JPY, also showed a net downward demand of 1.9 standard deviations, further confirming the market's bullish sentiment towards the Japanese yen.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7b30dd07-ff78-4c9e-9946-b3b2e4294dab.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7b30dd07-ff78-4c9e-9946-b3b2e4294dab.png"/>
In terms of exercise prices, there was a clear left tail phenomenon in the USD/JPY put options, with exercise prices extending to 136, and trading volume below 145 surging.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bca83850-a8a4-4855-8e38-bc73e0f7756e.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bca83850-a8a4-4855-8e38-bc73e0f7756e.png"/>
Some exercise prices are set at levels up to 10% below the forward parity level, which JPMorgan Chase believes may reflect market expectations of further depreciation of the USD/JPY.
JPMorgan Chase also pointed out that in terms of more widespread arbitrage trading positions, since May, around 40% of typical foreign exchange arbitrage trades may have been unwound, further indicating an increase in bullish sentiment towards the Japanese yen.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/85113a95-5725-479a-8480-3b92e36b4971.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/85113a95-5725-479a-8480-3b92e36b4971.png"/>
<h2>The power of short positions should not be underestimated, but unwinding may continue</h2>
JPMorgan Chase stated that yen shorts had already begun to reduce their positions before this week, but the market still expects a large number of short positions waiting to be unwound.
According to foreign exchange futures data on July 16th, the net position of the Japanese yen was still a short position of -1.8 standard deviations, consistent with its historical arbitrage positioning among G10 currencies.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3cf688b5-c0d6-47fd-87e0-424c4501c5bb.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3cf688b5-c0d6-47fd-87e0-424c4501c5bb.png"/>
However, between July 9th and July 16th, there was a +2.8 standard deviation unwinding of yen short positions in the market, which JPMorgan Chase believes may be related to the cooling of US CPI inflation and Japanese intervention
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a5ad95d4-2e29-4cec-a9ca-a80ff525d78e.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a5ad95d4-2e29-4cec-a9ca-a80ff525d78e.png"/>
JPMorgan Chase also expects that the trend of short covering in the Japanese yen will continue this week. Based on last year's price action, it is inferred that a quarter of the Japanese yen short positions established in the past 18 months may have been unwound by now.
JPMorgan Chase states that this scale could have a significant impact on the yen's exchange rate, and if the market believes that the US dollar has risen excessively against the yen, then the yen's rebound will be more intense.
It is worth noting that despite the bullish sentiment towards the Japanese yen in the market, investors remain cautious about the downside risks of the yen. If the Bank of Japan fails to raise interest rates in July, especially if the central bank's bond-buying program is not reduced as scheduled, Japanese bulls are likely to be back to square one

JPMorgan Chase pointed out that the lowest exercise price for USD/JPY put options has been extended to 136. The trend of short covering may continue, and if the market believes that the USD has risen excessively against the JPY, then the rebound of the JPY will be more intense

"Yen Carry Trade Reversal" Update: Trading volume surges below 145, with a large number of short positions still waiting to be closed