Investors were piling into U.S. dollar/yen options last week, after the Japanese currency gained against the greenback, sending short-dated implied volatility higher.
The previous week's meeting of G7 finance ministers breathed strength into the Japanese currency which rose to JPY114.585 last Thursday from JPY117.48 week before. One-week implied volatility popped to above 11% from around 8% over the same period.
"The downward spot move has taken the triggers out of a lot of exotic options," said one trader, who added the JPY114 barrier should be the next to break. Another trader suggested it hasn't cracked yet because Bank of China is reported to hold a JPY114-120 double touch option and is protecting the downside by buying up bids in the spot market. "They are big enough to take it," he noted. It is unclear when the option expires, but some thought it would mature as DW went to press Friday.
Kristian Siggaard-Jensen, fx strategist at Saxo Bank in Denmark, said the medium-term direction of dollar/yen will be dependent on Japanese CPI data and the view of Ben Bernanke, chairman of the Federal Reserve, on the direction of the rates cycle. Both were due Friday. "If Bernake supports the end of the cycle and the data is positive, dollar/yen could be JPY109 within three or four months," said Siggaard-Jensen.
FX trading officials said some, however, were taking the view dollar depreciation will be short-lived and were snapping up dollar puts and selling dollar calls. "Risk reversals were very well bid," said one trading official. Another trader said there was appetite for both in- and out-of-the-money options with expiries at six months and one year.
