Ignore the strong non-farm payroll data! Hedge funds are turning bullish on Japan and heavily betting on the strengthening of the Japanese yen.

According to traders, despite strong US employment data weakening the market's expectation of a rate cut by the Federal Reserve this year, hedge funds have reversed direction and have made significant bets on the strengthening of the Japanese yen as the "long Japan" trade continues to heat up. On Wednesday, the yen rose against the US dollar for the third consecutive day, completely ignoring the upward pressure on the dollar from the US employment report. Just last week, hedge funds were increasing their short positions on the yen ahead of the key Japanese election, with the market widely expecting Prime Minister Shinzo Abe, if re-elected and given a new mandate, to implement expansionary fiscal policies that could weaken the yen again. Data from the US Depository Trust & Clearing Corporation showed that on Wednesday, trading volume for bearish options on the US dollar against the yen with a size of $100 million or more was about 50% higher than bullish options of the same kind. Currently, the premium paid in the market for hedging or betting on a weakening of the US dollar against the yen in the next month has risen to the highest level since February 2. Antony Foster, head of G10 spot trading at Nomura International, said, "Hedge fund sentiment has changed, with more and more funds beginning to buy into positions betting on the decline of the US dollar against the yen." He added that funds are also buying the yen against currencies like the Australian dollar and the Swiss franc. Foster, who is based in London, said, "This sentiment is like buying into the Nikkei index, betting on the stability of the Japanese economy, and ultimately results in buying the yen." After the landslide victory of the Liberal Democratic Party in the election, the yen initially came under pressure, but Japan's Finance Minister Taro Aso stated that the Japanese government would respond to exchange rate fluctuations in accordance with the US-Japan joint statement, leading to a rapid rebound of the yen. Nathan Swami, head of FX trading for Citigroup in the Asia Pacific region based in Singapore, pointed out that as the yen rebounded, the market was closing out short-term long positions on the dollar against the yen before the release of the US employment data, with hedge funds and asset management institutions both selling the currency pair. Other traders noted that positions in the FX options market have also shifted to bearish on the US dollar against the yen, with hedge funds buying short-term bearish options on the dollar against the yen ahead of the release of the US nonfarm payroll data on Wednesday. Swami stated before the release of the US nonfarm payroll data, "There is still strong demand for bearish options on the dollar, and the risk reversal indicator (used to measure the price difference between bullish and bearish options of the same kind) is pointing strongly towards a weakening of the dollar."