The yen's rise in the spot market prompted foreign exchange market participants to purchase long-dated out-of-the-money yen calls last week, as a punt on the yen consolidating its strength, according to options traders. This was particularly clear in the dollar/yen pairing, said traders, because investors were predicting yen strength combined with further dollar weakness. The yen rose consistently against the dollar in the spot market last week, reaching JPY106 on Wednesday, up from JPY112 two weeks before. One-month dollar/yen implied volatility was around 10% when DW went to press on Friday, up from 8.5% at the start of the month. Implied volatility peaked at 11% on March 18, when the Bank of Japan announced it would stop intervening in the currency markets to prevent the yen rising against the dollar.
Trading was dominated by hedge funds and proprietary traders buying two or three-month yen calls with strikes at JPY95 or JPY100, noted a trader at a German bank. A common strategy was to buy at-the-money dollar put spreads, with maturities ranging from one month to three months. These positions were attractive, said a trader, because the low volatility made the option premium low.
Hans Redeker, currency strategist at BNP Paribas in London, said, "We see that yen strength is already a trend." Signs are increasing that domestic demand conditions are picking up, which means the Japanese economy is no longer reliant on exports, he added. The exchange rate question is likely to be on the agenda again at the next Group-of-Seven meeting at the end of April and the Japanese government is likely to have fewer reasons for preventing increased yen strength, said Redeker.
USD/JPY Spot & One-Month Implied Volatility
