BNP Paribas is recommending clients buy dollar calls/yen puts to take advantage of an expected dollar appreciation against the yen. Ian Stannard, foreign exchange strategist in London, said the bank is recommending investors enter a deferred premium five-month knock-out dollar call/ yen put with a strike of JPY120. The investor pays a premium of 200 basis points if the dollar depreciates as low as JPY114. If the greenback does not break that barrier, the option is free. The exotic is sold in a minimum notional of USD1 million.
The investor does best with this structure if the dollar appreciates past the JPY120 strike without first breaching the JPY114 barrier. According to the bank's technical analysis, this is a likely outcome: the dollar should bottom out at JPY115.05-JPY114.85 before rising, potentially as high as JPY133 by June. Dollar/yen spot was trading at JPY116.30 on Wednesday. A plain-vanilla dollar call/yen put would cost 145bps at this spot rate.
To offset poor earnings, Japanese corporates have sold foreign assets to shore up their balance sheets before March, the end of the fiscal year for most companies in the country, said Stannard. Once the repatriation of funds has stopped, buying pressure on the yen should ease and the dollar will shoot up, he added.
