Yen calls and U.S. dollar puts were being snapped up last week after an opinion poll showed a rise in popular support for Japan's government, up for re-election in September. The poll dispelled some uncertainty over the political outlook, driving the yen higher against the greenback to JPY110.4 Wednesday from JPY112.4 the Monday before.
Traders were mostly buying in-the-money options out to one month, but options with a strike of JPY108.5 were also well-bid, one trader said. One-month implied volatility on the cross fell to 8.25% Wednesday from 8.5% the week before.
The positive opinion poll caused the Nikkei to break through the 12,000 mark, a 15-month high, resulting in speculation that more foreigner investors will buy into Japanese equities. This led players to pile into yen calls. Also last week, the People's Bank of China announced the launch of yuan currency swaps and said more banks would be allowed to trade yuan forward contracts. The bank also revealed the composition of the currency basket against which the yuan will be valued. The basket will mostly include the greenback, yen, euro and the Korean won, although the weight of each currency was not announced. "These things add up to looser currency policy in China, which is good for the yen," the trader said.
In the U.S., the Federal Reserve Bank raised interest rates by another quarter percent last week to 3.5% but this offered the greenback little support because the hike was expected, and because market players are holding back until the release of June trading figures, out last Friday after DW went to press.
