Traders piled into euro calls/yen puts last week after a jump in euro/yen spot to JPY109 on Thursday from JPY106 on Monday. Demand for two-week to one-month options pushed the risk reversal to 0.7 in favor of 25-delta euro calls/yen puts on Wednesday from 0.2 favoring 25-delta euro puts/yen calls a week ago Friday. Traders said risk reversals flipped so quickly because market makers had been short euro calls before the rally as the euro had been depreciating against the yen.
Strikes on the calls ranged from at the money to JPY113, which was the previous euro/yen high. One-month implied volatility rose from 15.5% on Tuesday to 15.8% on Thursday.
Michael Lewis, senior economist at Deutsche Bank in London, said the Bank of Japan's 10 basis point interest rate cut on Wednesday was seen as evidence that domestic demand in Japan is weak and reinforced concern about the Japanese economy. Deutsche Bank forecasts 1% growth for Japan this year compared to 2.6% growth in the euro zone. The appreciation of the euro against the yen earlier in the week was due to strong euro data against the dollar, Lewis explained. Deutsche Bank's three-month target for euro/yen is JPY120.