The cost of U.S. dollar/Japanese yen options inched higher last week and the greenback gained on the yen, as investors speculated that the Bank of Japan's intended reforms will lead to a medium-term weakening of the yen. One-month implied volatility rose to 10.7% Wednesday in New York, up from 10.2% earlier in the week. The move was in line with a stronger dollar. The pair traded at JPY123.20 by Wednesday, up from JPY122 Monday.
"Right now when dollar/yen rallies, we're seeing people come in and buy options, people are putting on plays and starting to expect bigger moves up," said one trader in New York. He said a common trade was for investors to buy six-month and one-year dollar calls/yen puts with strikes at JPY130 or higher. The general belief that the yen is headed for a downturn also led to a fall in risk reversals, with one-month 25-delta risk reversals slipping to just 0.25 vol in favor of yen calls/dollar puts, down from as high as 1.5 vol in recent weeks.
T.J. Marta, a currency strategist at Citibank in New York, said the BoJ needs to make serious reforms and, even if they are successful, "will have to endure some exquisite pains in the interim." He noted that risk reversals have favored yen calls/dollar puts since the spring, and while they still do so, are inching closer to neutrality by the day. He said the hedge fund community continues to bet against a stronger yen in the medium-term by purchasing dollar calls/yen puts. "In the longer term [the restructuring] could be a positive for Japan, but it's going to take a while."
