The cost of U.S. dollar/Japanese yen options increased last week as investors continued to show concern over the Bank of Japan's intended reform of the country's banking sector. "The Japanese government is likely to create an inflationary environment to try to force the yen higher, however with the Nikkei hitting a 16 year low last Tuesday, bottoming at 8,500, the banking sector also looks weak and professional money is betting on a weaker yen," noted one trader in New York. One-month implied volatility rose to 10.5% Wednesday, up from 10% the week before. One-year volatility increased to 9.75%, from around 9.5% in the same period. The pair traded at JPY124.24 Wednesday, up from JPY123 Monday.
Traders have been buying dollar calls/yen puts and euro calls/yen puts. They have been looking for euro/yen and dollar/yen to stand at least 5% higher by year end, slowly grinding up to JPY130, where the strikes typically sit, said the trader. Trading activity is being dominated by hedge fund managers who are buying options with various maturities, including one-week, one-year and five-year, he noted.
However, not everyone agrees that the yen will plummet against the dollar. Andrew Chaveriat, v.p. in foreign exchange at BNP Paribas in New York, noted that the dollar/yen rate is meeting some resistance around JPY124-125, and the yen may strengthen to around JPY115 later this year. "The rate might get up to JPY125-126, where there will be some profit taking and then there will be a trend reversal to the dollar rally," he said. The dollar is beginning to run out of steam following its run up since July, where the yen has jumped from JPY117 to JPY124.
USD/JPY Spot & One-Month Implied Volatility
