The U.S. dollar weakened against the Japanese yen last week and broke through a significant options barrier at JPY108 to reach JPY107.60 as DW went to press on Thursday. The foreign exchange market was gearing up to start testing barriers at JPY104 and JPY105, according to traders, who saw a flurry of options buying on the currency pair in an otherwise quiet market last week. Options activity was restrained in other areas because volatility on the dollar/yen currency pair remained low due to the slow weakening of the dollar. One-month implied volatility was little changed at 11.4% on Thursday, down from 11.6% on Monday.
The Japanese yen pushed through the JPY105 barrier at the end of March, but the dollar was supported by intervention from the Bank of Japan (DW, 4/5). Market players are sceptical that the Bank of Japan will intervene this time because Japan's economy is looking healthier, said one trader. Prop desks, market makers and hedge funds were all purchasing options on the yen's upside, he added. One popular trade was a one to three-month yen call spread with strikes at JPY104 and JPY108. There was also interest in reverse knock-outs with strikes in a similar range to the call spreads. "Everybody is getting ready to test the Bank of Japan," said the trader.
"Further yen strengthening is in line with our forecasts," said Tony Norfield, currency strategist at ABN AMRO in London. He noted, however, that rising rates in the U.S. could prevent the dollar from sliding below the JPY105-104 barrier. A more dramatic show of yen strength may be seen against the euro or even Australian dollar, added Norfield.
