The U.S. dollar surprised the market by gaining against the yen at the start of last week, putting pressure on barriers around JPY115 that had not been tested for nearly a year. Renewed greenback confidence sent speculative accounts scrambling to buy up dollar calls. The dollar jumped higher to JPY114.385 against the yen last Tuesday, compared to JPY 113.825 at the end of the previous week. Implied volatility remained subdued, however, with one-month hovering around 8%.
Traders said most speculative accounts were buying dollar calls with strikes between JPY116 and JPY119. Those buying out to two or three months were buying calls with strikes closer to JPY119, while those buying shorter-dated calls were opting for strikes near JPY116. Most players were financing the dollar calls by selling downside puts at JPY109 and JPY110, explained a trader at a U.S. house. Others were buying cheaper options with one-touches at JPY120 or JPY123. There are a lot of barrier options at JPY115, noted one trader, who said some players seem to be waiting to see what happens if the barrier is breached before positioning.
Ian Stannard, currency strategist at BNP Paribas in London, said the dollar may run out of steam against the yen when it hits the barriers at JPY115. He noted signs foreign investor flows into the U.S. are slowing will put pressure on the dollar's spurt.