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Firms Buy Dollar Calls/Yen Puts As Yen Rally Ends

One-week U.S. dollar/ Japanese yen implied volatility hovered around 11% Wednesday coming down from its high of 15% a week earlier as last week's surprise yen rally lost steam and investors bought dollar calls/yen puts. The majority of the positions were three-month options with strikes between JPY135 and JPY140. Spot was at JPY129.5 compared to JPY128.6 during the yen's rally a week earlier. Investment banks were the big players in the market. "The major currency pairs have been really subdued. People were taking up short positions and the front end of the curve has really flattened out," said one options trader in New York.

One-month 25-delta risk reversals moved further in favor of dollar calls after the buying. Traders said this was a direct reaction to last week's unforeseen strengthening of the yen, when the currency had its largest one-day gain against the dollar in more than seven months, which pushed up implied volatility by 300 basis points. "The correction in the market that people were predicting after last week's surprise is happening. Things have been adjusted," said another trader.

Bob Gay, global head of fixed income research atCommerzbank Securities in New York, said the sudden strengthening of the yen last week was due to a boom in asset sales by Japanese investors, who were preparing for the end of their fiscal year on March 31. "It's now getting late in the month and things are beginning to wind down," he noted. Gay predicted the yen would continue to correct itself and resume weakening over the coming weeks.

USD/JPY Spot & One-Month Implied Volatility

Source: JPMorgan

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