How hard are some hedge funds working to profit on non-farm payrolls day? Some are making alternative bets
Some hedge funds are using extreme currency options to hedge against the volatility of the upcoming US employment data release, especially betting on the Japanese yen. These bets could profit if the yen appreciates significantly in the next 6 to 12 months, mainly focusing on longer-term options trading. With the release of the non-farm payroll report, these trades may impact assets such as the US dollar, treasuries, stocks, etc., prompting some hedge funds to adopt a wait-and-see approach, waiting for market direction to become clear
A small group of traders are making extreme bets on currency options, aiming to hedge against any volatility from the upcoming US employment data, with the yen at the core of this strategy.
Ruchir Sharma, global head of foreign exchange options trading at Nomura Holdings, Japan's largest brokerage firm, stated that the company has identified individuals making an alternative bet that would profit if the yen appreciates significantly within a 6 to 12-month window.
In the over $300 billion foreign exchange options market, longer-term bets are worth noting as a significant portion of trades are concentrated within the next three months or shorter.
Sharma said, "This is being driven by a few funds that have been buying yen call options with strike prices well below current levels and maturities of 6 months to 1 year." He mentioned that these trades are betting on weak US employment data and profiting from a sharp strengthening of the yen.
With investors facing a series of risk events on Friday, the appeal of longer-term trades is on the rise. The US non-farm payrolls report will provide new clues about the Federal Reserve's policy path, followed shortly by speeches from New York Fed President Williams and Fed Governor Waller two hours later.
In summary, these events could shake various assets from the dollar to treasuries, stocks, and options.
Predee Anuvatnujotikul of SPX Capital Management SG Pte hedge fund stated that Waller will be the "official guidance", "For example, if the non-farm payrolls data is strong but Waller hints at a larger-than-expected rate cut, it will be a complete repricing."
This outlook is also encouraging another trading strategy: staying on the sidelines. Some hedge funds have decided to wait and see until the dust settles. This week, the trading volume of foreign exchange options at the Depository Trust and Clearing Corp. was only a small fraction of recent levels, with Wednesday's volume about 39% lower than the 5-day average.
Anuvatnujotikul of SPX Capital mentioned that having "firm conviction" before Friday is just too difficult.
If the employment report falls below economists' expectations, the dollar may come under pressure as traders increase bets on a 50 basis point rate cut by the Fed on September 18. Conversely, stronger data could push the dollar higher. Even for strategies that profit from both outcomes by buying dollar call and put options, the risks seem too high.
Anuvatnujotikul said, "Trading purely from a call gamma position would also be challenging as you have to be prepared like a ninja." He referred to fast money funds trying to capture highs and lows in any dollar movement to hedge their options positions Hedge fund Mount Lucas Management, headquartered in Pennsylvania, is taking a cautious approach, according to the fund's Chief Investment Officer David Aspell:
"From a cautious perspective, we are holding back to observe how things unfold. We have some options on the US and Japan, but nothing significant in terms of scale."