Political turmoil in France triggers market turbulence: Hedge funds massively sell euros to invest in yen, betting on Japanese interest rate hikes

According to the Zhitong Finance APP, recently, the no-confidence vote in France has intensified market turmoil, prompting currency options traders to actively short the euro against the yen, leading to a surge in trading volume for this currency pair and an increase in implied volatility to its highest level since August. Data from the American Depository Trust & Clearing Corporation shows that since early November, there have been two trading days where the trading volume of euro-yen options exceeded $3 billion, both occurring last week.

Specifically, Graham Smallshaw, a senior forex spot trader at Nomura Singapore, pointed out that in recent days, short positions in euro-yen have replaced short positions in dollar-yen as the market mainstream, especially in the macro hedging space. In the options market, cheaper downside structures such as put butterfly spreads or double-digit options are favored over direct put options.

Macro hedge funds profit from market volatility triggered by political or economic events, predicting that the yen will appreciate further due to the potential interest rate hike by the Bank of Japan. The hawkish remarks from Bank of Japan Governor Kazuo Ueda have enhanced the yen's appeal, while weak regional economic data has made the euro a target for investors to sell off. The no-confidence vote in France could potentially overthrow the government, further exacerbating the pressure to sell the euro.

The yen to euro exchange rate is nearing its highest level since December 2023. However, macro funds are not limited to short-term put option trading; they are also considering medium to long-term factors such as the upcoming presidential inauguration of Donald Trump, the dilemma of the French elections, and the persistently gloomy market sentiment in the eurozone.

Before the inauguration of President-elect Donald Trump next month, JP Morgan has also observed a shift in investor preferences. Niraj Athavle, head of global client sales and marketing for Singapore and the Asia-Pacific region at JP Morgan, noted that although macro funds tend to trade with a short bias on dollar-yen, the uncertainty brought about by changes in the U.S. government makes them more inclined to buy yen, particularly against the euro.

Additionally, the U.S. employment data set to be released on December 6 has become another risk event affecting investors' trading decisions on the dollar, as the report could influence the willingness of Federal Reserve officials to cut rates at the December meeting