Investors bought somewhere on the order of a yard in short-dated U.S. dollar calls against the yen last week, struck around JPY124 and JPY125, anticipating dollar strength as Japanese corporates reinvest money they had repatriated. Japanese corporations last week repatriated funds ahead of fiscal year end in order to book profits, said traders in New York. With the new fiscal year, they are expected to send those funds back overseas. Spot was around JPY123.5 when the trades were put on mid last week. Last Thursday, implied vol for a one-week position with a strike of about JPY124 would have been roughly 15.5%, said Craig Puffenberger, managing director and global head of foreign exchange trading at Credit Suisse First Boston in New York.
One-week at-the-money implied vol surged on the trades, rising to about 15% by Thursday from about 11.5% on Tuesday.
The dollar last week approached recent highs against the yen. While expectations of Japanese reinvestment are a factor, so are deteriorating fundamentals in the Japanese economy. Data coming out of Japan has been worse than expected for about the last four weeks, noted Steven Englander, global currency economist at Citibank in London. Industrial production numbers released last week showed output was flat, while the market expected some sort of an increase, for example. "The dead cat bounced even less than people expected," said Englander.
