Arbitrage traders use Japan's bailout to rebuild short positions in yen, USD/JPY may retest 162

Comparing news, the effect of the Japanese authorities' intervention in the foreign exchange market to boost the yen is being challenged. Market data shows that arbitrage traders are using the opportunity of each round of yen rebound to re-establish short positions, creating a cycle where intervention pushes the yen higher and traders go short.

Earlier, the joint intervention of the US and Japan briefly boosted the yen's appreciation, but less than two weeks later, the dollar once again approached 160 against the yen. For arbitrage traders, official intervention instead provided a better selling price for yen.

This trading logic is mainly based on interest spread advantages: investors borrow low-interest yen and then allocate high-yield assets. As long as the yen does not continue to appreciate, interest rate spread income can cover part of the exchange rate risk. As of August 4, hedge fund short positions in yen have been reduced by about half, but some institutions are re-establishing arbitrage transactions using yen as the financing currency.

Market data shows that USD/JPY has recovered from around 157 to 159.43. Some traders believe that if there is no significant decline in US dollar and US yields, arbitrage trading may push the dollar to retest 162 against the yen.

It was previously revealed that the Japanese authorities may use tens of billions of dollars to support the yen by the end of July, of which the scale of intervention in a single day may reach about 53 billion US dollars, setting a record. However, large-scale intervention has not stopped the yen from approaching 160, indicating that market concerns about the Japan-US gap and Japan's fiscal pressure are still dominant.

Currently, the market is watching the Bank of Japan's next policy move. Traders are betting that the Bank of Japan may raise interest rates by 25 basis points in September or October, but analysts believe that as long as interest rates in Japan are still significantly lower than in major economies such as the US, arbitrage transactions funded in yen may continue.