Source: Golden Ten Data
The Federal Reserve and the Bank of Japan became the focus of the market. The trader's latest moves cover the most extreme situation of the year.
In early trading on Monday (April 29), the US dollar index soared in the short term, reaching a high of 106.11; the dollar once stood at 160 against the yen, rising more than 1.09% during the day. Meanwhile, spot gold hit 2,320 US dollars/ounce downward, falling by nearly 10 US dollars in the short term, and falling 0.75% during the day.
COMEX's most active gold futures contract instantly traded 1,327 lots within one minute from 09:35 to 09:36 Beijing time on April 29, with a total contract value of US$310 million. CME's most active EUR/USD futures contract instantly traded 1,174 lots within one minute from 09:35 to 09:36 Beijing time on April 29, with a total contract value of US$157 million.
In the new week, investors are focusing on the Federal Reserve's interest rate decision. The US dollar may gain further upward momentum, and gold and yen are viewed as high-risk products.
According to trading data, US Treasury options traders are preventing various risks, from multiple interest rate cuts this year to interest rate hikes before the Federal Reserve meeting this week.
Recent inflation data is still stronger than expected, reducing expectations that the Federal Reserve will cut interest rates in the near future. Although US Treasury bond futures short positions expanded last week and yields rose to a new annual high, the flow of options suggests that uncertainty surrounding the direction of the Federal Reserve's monetary policy this year is increasing, and end-of-line risk hedging transactions for multiple periods have emerged.
These positions cover the most extreme dovish and hawkish situation this year, including hedging against the December Federal Open Market Committee (FOMC) policy interest rate as low as 3%, which is currently priced at around 5% on the swap market.
On the other hand, options trading is also hedging the risk that interest rate targets are higher and longer. Even in the past week, positions preparing for another rate hike were popular. On Friday, a trader bought a bearish spread for March 2025, aiming for the Federal Reserve to keep interest rates stable until 2025.
Tanvir Sandhu, chief global derivatives strategist at Bloomberg News, said in an email, “The options market should reflect the possibility that the Fed may raise interest rates next. This is significant because expectations of interest rate cuts have been fading, but the threshold for raising interest rates is very high. The market (and the Federal Reserve) really needs data to prove that anti-inflation is back on track.”
Over the past few days, the US Treasury's tactical positions have been heavily shorted. As the yield rose to a new annual high, the 2-year US Treasury yield exceeded 5%, the 10-year US Treasury yield exceeded 4.7%, then declined slightly, and the number of open futures contracts continued to increase.
New capital is entering higher-interest trades, and short positions are increasing as futures are sold off. This is most evident at the front end and bottom of the curve. In the past 22 trading days, open positions on 2-year US Treasury futures rose 21 trading days. On Thursday, two-year US Treasury yields peaked at 5.025%, the highest level since November last year. Traders cut their expectations for interest rate cuts this year and beyond.
The foreign exchange market pays particular attention to the Federal Reserve and the Bank of Japan. The “appetite” for options that can be profitable by betting on large fluctuations in yen is close to the highest level since October 2022. Risk reversal indicators show that this is mainly to hedge against a sharp rebound in yen.
On Friday, the yen fell 1.8% against the US dollar to 158.44, a new low in 34 years. Earlier US data showed that inflationary pressure still exists, which supports Federal Reserve Chairman Powell's recent statement about keeping interest rates unchanged for a longer period of time. Since January of this year, the yen has accumulated a cumulative decline of nearly 11%. At a time when the yen is close to the 1990 low of 160.20, a sharp acceleration in depreciation may prompt the Japanese authorities to intervene.
The USD/JPY one-wave ratio hit its highest closing point in four months last Friday. Although the risks of the Bank of Japan meeting have been digested by the market, the risk of intervention has kept the demand for long-term exposure to fluctuations unchanged. Sandhu said, “If inflation proves to be unstable and interest rate cuts are further delayed, G10 foreign exchange options may be repriced further, which is beneficial to the US dollar.”
As the dollar broke the 160 mark against the yen in the Asian market on Monday, surpassing the level touted as Japan's “red line,” the rate at which the yen fell made traders question when the Japanese authorities might start supporting the yen, and why they are still not acting. Jane Foley, head of foreign exchange strategy at Rabobank, said that if foreign exchange intervention is to successfully reverse the trend of the US and Japan, the improvement in Japanese economic data will probably have to match the slowdown in US economic growth and the weakening of price pressure. This means that the Japanese authorities' efforts to scare off speculators could continue for weeks. Furthermore, another reason for Japan's apparent reluctance to act may be that intervention alone cannot change the huge interest rate gap, which contributed to a certain extent to the fall of the yen. Although the Bank of Japan has ended negative interest rates, it is still far from attracting investors from the US and other countries with high yields.
editor/tolk