The strong yen has sparked a divergence between bulls and bears: hedge funds are bullish on 140, while retail investors are adding to their short positions against the trend.

The continued appreciation of the yen is creating a rare standoff between bulls and bears in the foreign exchange market. Hedge funds are scrambling to position themselves with call options, some betting that the USD/JPY exchange rate will fall below 150 or even as low as 140 this year; meanwhile, Japanese retail investors are bucking the trend by increasing their short positions and sticking to their long positions in the dollar. These two diametrically opposed positions reflect a deep divergence in market opinions on the yen's trajectory.

The yen has appreciated by about 4% against the dollar this month, briefly touching the 153 level. Hedge fund bets are heating up – data from the Chicago Mercantile Exchange shows that the most active USD/JPY options on Tuesday were put options expiring in November with a strike price of 142.86, and the total number of put options expiring this year is more than three times that of call options. Jerry Minier, global head of G-10 linear foreign exchange trading at Citigroup, said, "Leveraged investors are reacting positively to the possibility of a systemic shift in exchange rates," and option structures betting on the dollar/yen falling below 150 this year are "very popular."

In contrast, Japanese retail investors are still shorting the yen against the trend. According to data compiled by Bloomberg from the Japan Financial Futures Association and the Tokyo Financial Exchange, Japanese retail investors held a net short position of approximately 3.61 trillion yen (about $23.5 billion) last week, an increase from August. Masayuki Nakajima, senior strategist at Mizuho Bank, warned that if the yen continues to appreciate, these investors may be forced to close their long dollar positions, triggering additional selling and further amplifying the yen's rise.

The yen's appreciation accelerated, and the break of the 155 level became a key turning point.

The recent appreciation of the yen has been driven by multiple factors. Hawkish statements from Bank of Japan Governor Kazuo Ueda and board member Hajime Takata, along with market expectations that domestic pension funds may adjust their asset allocation, have jointly boosted demand for the yen. The USD/JPY pair fell below 155, triggering numerous stop-loss orders and further accelerating its decline; the pair fell nearly 5% in the week ending last Tuesday.

155 is a significant support level. Graham Smallshaw, senior spot foreign exchange trader at Nomura Bank in Singapore, pointed out that 155 was a widely recognized support line, which was not breached even when the Japanese Ministry of Finance directly intervened in the foreign exchange market in May of this year. This break below 155 triggered a large-scale shift in macro hedge funds, with a significant increase in short positions.

Hedge funds are increasing their call option positions, targeting 140.

Institutional investors are extending their options positions to more aggressive price levels. Smallshaw stated that the macro community's current vision is "highly focused on the 150 to 152 target range," while demand has extended to 12-month options, with some traders betting as low as 140 through digital options and other option combinations.

Jerry Minier added that the yen's resilience following last week's strong US non-farm payroll report further bolstered investors' bullish sentiment. Saurabh Tandon, Global Head of FX Options at Standard Chartered, stated, "Most people tend to trade through straightforward downside options," noting equally strong demand from clients for options betting on other currencies weakening against the yen.

Retail investors are adding to their positions against the trend, and their holdings may act as amplifiers.

Japanese retail investors have a historical tradition of contrarian trading—buying US dollars when the yen appreciates and selling US dollars when the yen depreciates.

Ryo Suzuki, executive director of SBI Liquidity Market, said that retail investors initially bought on dips as the USD/JPY pair fell from 160, but became more cautious after it broke below 155, resulting in mixed buying and selling trends.

However, retail investors' confidence in their positions is showing signs of weakening. Suzuki points out that compared to the past, traders are now more inclined to proactively cut their losses rather than waiting to be forced to liquidate their positions. Net short positions in the yen reached a high of 4.41 trillion yen in July, the highest since 2015, and the current level of 3.61 trillion yen remains substantial. Masayuki Nakajima of Mizuho Bank warns that if the yen continues to strengthen, causing retail investors to liquidate their positions en masse, a sell-off in the dollar could follow, further amplifying the yen's rise.

Wall Street strategists are clearly divided, with the Bank of Japan and the Federal Reserve being key variables.

Wall Street strategists are divided on whether the yen can continue its upward trend.

Wells Fargo strategist Erik Nelson believes the Bank of Japan is unlikely to go beyond the market-priced-in rate hike path, thus limiting further upside potential for the yen. JPMorgan's co-head of global FX strategy, Meera Chandan, points out that an excessively strong yen is also not in the interest of the Japanese authorities, stating, "When the dollar/yen pair approaches the low of 150, especially in a hawkish Fed environment, the threshold for further appreciation will be higher."

Bank of America strategist Alex Cohen holds a relatively optimistic view, believing that "accelerated interest rate hikes by the Bank of Japan are a prerequisite for yen appreciation," and points out that if the yen remains at its current low level, Japanese exporters may begin to repatriate funds, constituting a new catalyst. Nathan Thooft, chief investment officer of multi-asset solutions at Manulife Investment Management, stated that if Bank of Japan policymakers confirm that further tightening is still under consideration, the yen will continue to receive support. Citigroup strategists, in a report, noted that the Fed's decision next week will be crucial in determining direction, and that "current downward momentum may push the USD/JPY pair down to around 152."

Policy signals are strengthening, and market competition is entering a critical window.

According to Bloomberg, the Bank of Japan is leaning towards raising interest rates by 25 basis points this month to combat rising inflationary pressures. Meanwhile, U.S. Treasury Secretary Scott Bessant publicly addressed traders on Tuesday, stating that he was "the big player now," implying U.S. support for a stronger yen and further bolstering market confidence in yen bulls.

The ultimate outcome for both bulls and bears will largely depend on whether the Bank of Japan can deliver on its interest rate hike expectations and how the Federal Reserve's policy path unfolds. Prior to this, the over 3.6 trillion yen in retail short positions represent both a potential risk of liquidation and a potential source of additional upward momentum should a reversal occur.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.