USD/JPY exchange rate reversal warning: Arbitrage shocks may trigger global asset turbulence

The USD/JPY trend is approaching a critical turning point. As we enter mid-February, the USD/JPY exchange rate has been steadily declining, approaching the 150 level, signaling a clear arbitrage risk in the market. With expectations of the Bank of Japan raising interest rates increasing and concerns over Japan’s fiscal situation easing, the yen has been appreciating continuously.

This shift has raised strong alertness among hedge funds. Data shows a significant increase in trading volume of large-scale USD/JPY put options, with puts exceeding 100 million USD in scale and nearly 50% more than calls. Over the next month, the premiums for options betting on USD/JPY decline have risen to their highest levels since early this month, reflecting market participants’ strong expectations of yen appreciation.

Chain reaction of large-scale unwind of arbitrage positions

Global financial research firm BCA Research has issued a warning that the recent yen appreciation could trigger a massive wave of arbitrage position unwinding.

To understand this risk, it’s important to grasp how arbitrage trading works. Investors typically borrow low-interest yen to buy high-yield assets (such as USD assets or US stocks), earning the interest rate differential. When the yen begins to appreciate, the logic of arbitrage reverses — investors need to sell high-yield assets to buy yen and repay their loans. This unwinding process will further accelerate yen appreciation.

BCA analysts note: “The next wave of unwinding will be triggered by two forces — falling arbitrage assets and strengthening yen rebound. While it’s unpredictable which will occur first, ultimately they will reinforce each other, leading to a sharp reversal in yen arbitrage trades.”

This means that once the unwinding begins, due to the large scale of these positions, yen appreciation could be extremely volatile. BCA emphasizes that this kind of counter-movement will far exceed simple technical adjustments.

Technical warning: key support levels under pressure

From a technical analysis perspective, USD/JPY has broken below the 100-day moving average and is approaching the previous low near 152. If this level is breached, the next major support is around the 200-day moving average, approximately at 150.

These technical levels are not just price markers but signals of structural shifts in the market. If USD/JPY continues to break through these critical points, it will confirm an increased market risk.

Cross-asset linkage: tech stocks face impact

Another important factor for the market to watch is the correlation between USD/JPY and global assets. Data shows a significant negative correlation between the yen and the Nasdaq 100 index. In simple terms, when the yen appreciates (USD/JPY falls), high-growth assets like tech stocks tend to face downward pressure.

If USD/JPY continues to break through key technical levels, not only will yen appreciation accelerate, but the resulting asset unwinding wave could also impact equity markets. Particularly, the tech sector in US stocks may experience notable downside shocks.

This indicates that fluctuations in USD/JPY are not isolated events but are crucial variables influencing global asset allocation. If the arbitrage unwind truly begins, its spillover effects could far exceed expectations. Currently, markets should closely monitor the defense of the 100-day moving average and the 150 level, as these will determine the future direction of USD/JPY and influence the performance of global risk assets.