Nine-month 25-delta risk reversals spiked to 3.2-3.3% in favor of yen calls/dollar puts over yen puts/dollar calls from 2.8% the week before. Although the dollar has depreciated to JPY108.80 on Thursday from JPY111.20 the previous week, one-month volatility remained almost unchanged at 12.1% last week.
Traders commented that the short-term market seems to be calmer despite the spot rate passing through the JPY110 barrier. In the longer dated maturities, beyond one year, the market is short calls because of interest-rate traders hedging their books on the back of the dollar's depreciation. In addition, the move in dollar/yen has caused the options embedded in structured notes--that Japanese investors bought when the dollar was stronger--to become in the money. This means the banks that sold the notes need to buy more options to cover their positions. This has caused the spike in risk reversals. Traders said that investors had been trying to buy in-the-money one-year yen calls with strikes at JPY90-100 but because premiums were so high, many had opted for at-the-money calls.
David Bloom, currency strategist at HSBC in London, said the dollar is likely to continue to depreciate against the yen. But he said the speed of the decline would likely depend on the extent to which the Bank of Japan attempts to prevent this. The BoJ has around USD110 billion left to spend on intervention before it has to ask for further funds, according to market estimates. The BoJ spent around USD40 billion last month intervening. At current rates the existing money would be used by year end, so a dip in the new year is likely, especially if there is a delay in getting more funds, noted Bloom.
USD/JPY Spot & Nine-Month 25-Delta Risk Reversals
