FX Options Insights 15/01/25

During the CFTC reporting period from January 8-14, the USD net speculative long position likely grew, supported by a 0.48% rise in the index. The EUR declined by 0.32%, likely due to an increase in short positions as the interest rate gap between the ECB and the Fed widened. The JPY saw a slight decrease of 0.05%, with short positions increasing alongside rising US yields, though sentiment for a potential Bank of Japan rate hike strengthened the yen after the period ended. The GBP dropped significantly by 2.1%, pressured by rising fiscal uncertainties during the period. However, softer UK CPI data, falling gilt yields, and Starmer's backing of Reeves helped stabilise the currency. The CAD eased by 0.13%, a decline mitigated by less aggressive Trump tariff rhetoric. Meanwhile, the AUD fell by 0.61%, weighed down by diverging expectations for RBA and Fed interest rates in 2025.

A key difference now compared to the BOJ’s surprise last year is the reduced speculative pressure on the yen. Before the rate hike last year, traders heavily bet on a yen decline, whereas current short positions amount to just $1.6 billion, a relatively small figure. The recent rise in USD/JPY was largely driven by short covering, as traders who expected BOJ tightening adjusted their positions after a policy shift disappointed them, triggering a short squeeze. Despite potential rate hikes, the BOJ's continued bond purchases ensure an extremely accommodative policy stance. As a result, USD/JPY dips may remain shallow, with a break below 162 potentially accelerating declines. However, without significant speculation on further tightening, the rate could soon approach 166.