The U.S. dollar likely will appreciate to between JPY125-127 over the next two-months and to take advantage of the move Ken Landon, senior currency strategist at Deutsche Bank in Tokyo, recommends investors purchase dollar calls or buy the greenback outright in the spot market.
A growing interest among Japanese firms in buying U.S. assets, coupled with a belief that Japan's new prime minister, Junichiro Koizumie, will struggle to implement reform, will see the yen grind lower against the dollar, Landon predicted. Optimism about Koizumie's appointment has already been priced into the currency market, he added.
In one strategy Landon suggests investors purchase a two-month JPY125 call outright, or finance the long call position by selling a two-month JPY130 call. The dollar was trading at JPY123 in the spot market last Wednesday. Two-month implied volatility was at 9.8%, versus historical levels of 13.5% for similar maturity options. Vols are at their lowest level since 1997, as the yen has recently been trading in a tight range, squeezing out volatility, he explained.
Peter Redward, Asian currency strategist at Deutsche Bank in Singapore, added that since volatility is so low, the options market offers an inexpensive way to go long dollars and leverage the view.