Derivatives traders were scrambling to buy downside protection last week after buying dollar calls as the yen appreciated to JPY106.20 against the greenback the week before. "Banks got short strikes on the upside and now they are trying to cover it and limit the damage," explained Lawrence Rhee, who heads foreign exchange options trading for Société Générale in New York.
Fx traders are now getting ready for a quiet period after last week saw a rate cut by the Federal Reserve, the Tanken survey by the Bank of Japan and the U.S. trade-balance data. "With all the risk events out of the way, people have been slamming volatility to lower levels because they don't think much is going to happen," said Rhee. "People are squaring away for the year," he added.
Banks buying dollar calls sought to cover flows or short option positions they may have accumulated from previous inventories, Rhee explained, adding these positions became riskier at JPY106 than they were at JPY102 a couple weeks prior. But, after what Rhee described as a technical reversal and consequent normalization, no one is desperate to buy calls anymore. Dollar puts have proven the more popular position, drawing mainly banks trying to balance their inventory, but also attracting investors nervous the dollar downtrend will continue.
