Volumes in yen puts/dollar calls doubled last week as the yen depreciated against the greenback to JPY123.74 and the market predicted a further slide. One trader said banks were buying yen puts with strikes between JPY127-JPY128 with maturities out to nine months. The demand for yen puts/dollar calls caused the 25-delta risk reversal to spin around from 0.1 in favor of yen calls/dollar puts two weeks ago to 0.5 in favor of yen puts/dollar calls last Thursday. A U.S.-based trader estimated USD2 billion (notional) of yen puts traded last week, which is the approximate typical volume for the whole dollar/yen options market on a normal week.
Implied volatility for one-month dollar/yen options remained steady at approximately 10% because the market is long yen call/dollar put barrier options, said traders. The barriers have strikes ranging from JPY112-JPY119, knock out at JPY125, and expire this week. The barrier options, which were put on earlier this year when the yen was stronger against the dollar, have started to turn toxic, according to one trader.
Steven Saywell, foreign exchange strategist at Citibank in London, said the yen has been falling against the dollar because of capital outflows from Japan. He added fund managers were net investors in Japanese equities for 11 straight weeks until three weeks ago, since when they have been net sellers. The turnaround was due to lowered expectations of the new government's ability to introduce banking reforms, as well as a continual flow of weak data out of Japan. Citibank's three-month forecast for the currency pair is JPY126 with a six-month forecast of JPY130, according to Saywell.
