Currency options traders last week were snapping up euro calls/yen puts and U.S. dollar calls/yen puts as they expected the Japanese currency to continue to decline. Euro calls/yen puts were trading with typical strikes of JPY114-115 and maturities of one-two months while dollar calls/yen puts had various strikes to reflect greenback upside. The dollar calls/yen puts were also for maturities of less than two-months. Traders said demand for the options came from bank's proprietary desks and corporates hedging exposures. Euro/yen spot was trading at JPY111.15 and dollar/yen spot was JPY121 on Wednesday.
"All the factors are turning against the yen at the moment," said Jesper Dannesboe, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein in London. "Monetary policy is now almost powerless." Dannesboe thinks a weak yen is Japan's only chance to halt the slide in its balance of payments deficit and help the country's economic recovery. Dresdner's forecast for euro/yen is JPY132 and its forecast for dollar/yen is JPY126 by the third quarter. But Dannesboe said these forecasts could be hit much sooner. Ian Stannard, foreign exchange strategist at BNP Paribas in London, thinks the yen could slip even further to JPY135 against the euro in the medium term because of speculative flows against the currency.
