Arbitrage trading closing risk intensifies! The upward momentum of the yen accelerates: breaking above 155 triggers stop-loss orders, with the 152 area becoming the next target.

The exchange rate of the yen against the US dollar has surpassed 155, triggering stop-loss orders and approaching this year's highest level, making the 152 area the focal point for traders. The yen rose by 0.4% on Tuesday to 153.80, following a 1.2% increase overnight, and is up nearly 4% this month, making it the best-performing currency among G10 currencies. According to a trader familiar with the trading situation who wished to remain anonymous, the dollar-yen exchange rate falling below 155 triggered a large number of stop-loss orders and forced option traders to sell dollars. The recent movement of the yen has not been caused by a single factor. Some traders pointed out that the market lacks liquidity around US holidays, while others believe that the yen's breakthrough at 155 accelerated a pre-existing upward trend. Last week, as market expectations for an interest rate hike by the Bank of Japan intensified, the yen began to strengthen, leading to a dramatic reversal in market sentiment. Additionally, speculation regarding potential adjustments in the asset allocation of Japan's Government Pension Investment Fund has also supported the yen's exchange rate. Rodrigo Catril, a strategist at the National Australia Bank, stated, The fall below the support area overnight has clearly opened the door for further declines. The dollar-yen pair seems likely to test the previous lows around 152.27 and 152.10. The 152.10 area is the strongest level for the yen against the dollar this year, and as upward momentum increases, the importance of this area has grown. Technical indicators also suggest that after breaking below the support level near 155, 152 may become the next target. Analysis indicates that forex traders are turning their attention to the next threshold for dollar-yen, with the strengthening downward momentum making the 152 area a candidate target. Motonari Sakai, head of forex trading at Mitsubishi UFJ Trust Bank, noted that if the yen breaks above the 154 low, the next target may directly point to the 152 yen range. The trajectory of the yen has been gradually improving, and the options market supports this notion. Although Monday was a US holiday, the global forex contract trading volume remained significant, with yen cross pairs being particularly active. The surge in one-year yen forward contracts highlights the scale of short covering in the yen, with these short positions currently traded against the euro, pound, and Swiss franc. This will further exacerbate the downside pressure on the dollar-yen. The pace of these moves has raised concerns over the potential for a broader unwinding of yen financing arbitrage trades, where investors borrow yen at low costs to invest in higher-yielding assets elsewhere. Rinto Maruyama, a senior interest rate and forex strategist at SMBC Nikko Securities, stated, Our fundamental view is that a break below 154 could trigger further unwinding of yen arbitrage trades and more stop-loss orders, thereby leaving room for further appreciation of the yen. He also added that the reduction in open interest means investors have the opportunity to re-establish yen short positions. Data shows that the yen has suffered declines of more than 1% against high-yield currencies such as the Brazilian real and the South African rand. A senior forex options trader at Nomura Securities pointed out, The easy arbitrage trading era is over, and the scale of cross-border capital flowing from Japan to the US may have fundamentally changed. Currently, market focus has shifted to the US CPI data set to be released on Friday, seeking clues about the Fed's policy outlook. In Japan, investors will closely monitor remarks from BOJ board member Takeda Hajime for indications of future interest rate hikes. Previously, Takeda clearly stated that future rate increases would not be rigidly limited to 25 basis points and that continuous hikes were possible under normal circumstances. This statement comes just three months after the rate hike in June, and if there is another increase on September 18, it will mark the fastest pace of tightening under Governor Ueda. The larger test lies in next weeks Bank of Japan policy meeting. The overnight index swap market is pricing in a 97% probability of a 25 basis point hike, raising the threshold for policymakers to issue sufficiently hawkish signals to maintain yen appreciation. Catril remarked, The yen is at a crossroads. An interest rate hike next week is a necessary condition, but to sustain the yens recent upward momentum, the BOJ needs to release hawkish signals and reaffirm market expectations that the likelihood of another rate hike before the end of the year is greater than that of no hike.