Shi Po's attitude changes dramatically, stimulating traders' nerves, and yen arbitrage trading becomes the focus again

Arbitrage trading centered on the Japanese yen caused a market crash in August and has now regained investors' attention.

According to the Smart Finance APP, Japan's newly appointed Prime Minister Fumio Kishida previously stated that the economy is not ready for further interest rate hikes, inspiring traders to increase speculative positions expecting the yen to weaken.

Institutions such as Royal Bank of Canada Capital Markets and Mizuho Securities believe that the yen to dollar exchange rate may fall to the level of 1 USD to 150-155 JPY, increasing the attractiveness of selling yen and buying high-yield assets favored by hedge funds through lucrative but risky arbitrage trading.

Nick Twidale of ATFX Global Markets commented on arbitrage trading, saying, "It's back. The new Prime Minister has essentially given us the green light to sell the yen temporarily."

Data shows that the yen exchange rate recorded its largest drop in over two years at the close on Wednesday. Kishida's warning caught investors off guard as they had previously believed he supported Japan's tightening policies. Forward traders reduced the possibility of a December rate hike by the Bank of Japan from 26% to around 22% on Wednesday, providing new impetus for traders to sell this third-largest traded currency globally.

This development also draws attention to Japan's $4.4 trillion in overseas assets and how the risk of the Bank of Japan slowing down rate hikes may affect capital outflows. While some view these investments as a massive arbitrage opportunity, they are often long-term investments, different from speculative positions.

In the short term, the US employment data to be released on Friday may provide investors with new clues about the yen's trend.

Mary Nicola, a strategist at Bloomberg Markets Live, stated, "Since Kishida has expressed his belief that the Japanese economy is not yet ready for further rate hikes, traders can rebuild arbitrage positions ahead of the election."

Shoki Omori, Chief Strategist at Mizuho Securities, said, "Yen arbitrage trading may revive, depending entirely on the momentum of the yen. If the Bank of Japan appears dovish, US economic data outperforms expectations, and the dollar is boosted by tensions in the Middle East, then the USD/JPY exchange rate faces the risk of heading towards 155."

On Thursday, the yen continued its decline in Asian markets, falling to 147.24 at one point, the lowest level since August 20.

Temporary Pullback

However, for others, the weakness of the yen may be temporary.

Kishida's unusually direct warning was issued before the national election on October 27, which may reflect a lack of experience in communicating with the market. Institutions such as NLI Research Institute believe that this may be a way to increase the chances of a clear victory in the election, which could reassure yen bulls that the weakness of the yen may be short-lived Morgan Stanley stated that the volatility of the Japanese yen has further weakened the attractiveness of shorting the yen. Over a three-month period, the yen to dollar exchange rate once fell to a more than 30-year low of 161.95, only rebounding to below 140 last month.

Gareth Berry, a strategist at Morgan Stanley in Singapore, said, "This is a setback for the yen, but only temporary. This will only make it more difficult for us to reach our year-end target of 135, but it is not impossible."

However, there may currently be no obstacles to further weakening of the yen, especially after Bank of Japan Governor Haruhiko Kuroda sent a dovish signal on Japan's policy outlook.

Charu Chanana, a strategist at Saxo Markets in Singapore, stated that the Federal Reserve's interest rate cut cycle will also be a key factor in determining the yen's trend, despite the sudden shift by Yoshihide Suga "disappointing yen bulls."

Chris Weston, research director at Pepperstone, wrote in a report, "You can certainly prove" that the market is seeing a resurgence of yen funding arbitrage positions. However, with increased volatility and widespread geopolitical risks, "to truly engage in arbitrage trading, one needs a brave soul"