The silence was deafening last week in the dollar/yen options market as vol began retracing after steadily climbing upward for months. With spot off its recent high of JPY125, one-month vol fell to the high 12% region from the mid 13% region, said John Meyer, fx options trader at UBS Warburg in Stamford, Conn. Traders in New York said following the Bank of Japan meeting Monday and the U.S. Federal Open Markets Committee meeting Tuesday, uncertainty was taken out of the market. Demand for bullish dollar options trades against the yen abated for the first time in weeks, the traders added.
There was limited six month and one-year dollar call buying, mainly from prop traders and hedge funds. The six-month calls were struck at JPY140 and the one-year calls at JPY145. Notional sizes ranged from USD100-500 million.
Japan has been going through a decade long free fall since the economy has entered a deflationary spiral. There are a number of factors fueling the spiral, including downturns in the domestic real estate and equity markets, and a rapidly aging population keen to save for retirement, according to Jason Bonanca, v.p., fx options strategy at Credit Suisse First Boston in New York. The Bank of Japan previously attempted to stop the spiral by bringing interest rates down to zero, which coupled with government spending, was meant to spur growth, but the measures failed. The Bank of Japan raised interest rates in August as it believed deflation was ending, but then lowered interest rates in February. After data released revealed a drop in industrial production, the market began demanding extraordinary action. Expectation of a major change in monetary policy helped fuel the rise in the yen to the JPY123 region. Last week, the Bank of Japan delivered, announcing that it planned to target monetary growth rather than interest rates, and pledging to do so until inflation is positive.
