BoJ Policy Shift Prompts Yen Call Buying

Short-dated Japanese yen calls/U.S. dollar puts were being snapped up last week after GovernorToshihiko Fukui hinted the Bank of Japan may raise interest rates, driving the yen higher against the greenback. Fukui said rates will stay near zero, but the news was enough to push down the dollar to JPY120.20 on Thursday from a 32-month high of JPY121.39 on Monday.

Players who were long dollar in the cash market were buying yen calls to protect positions. "They are worried about dollar moving lower," said one trader. Strikes were typically around JPY119 and one week maturities were the most popular. One-week implied volatility was around 8.8%, said traders, rising from 8.1% on Monday. Another trader also attributed dollar/yen trading to players positioning on carry trade potential between the two economies.

Tony Norfield, currency strategist at ABN AMRO in London, said speculators on BoJ policy have turned to the options market because it is an easy way to play dollar/yen. He added yen will maintain appreciation against the greenback. "There is an upward trend that doesn't look like being broken," he noted. Strategists at BNP Paribas agreed the dollar/yen pullback will continue, but noted in a report it is highly dependent on interest rate differentials. Traders also said the yen gained ground against the euro, to JPY141.70 from JPY142.34, and sterling to JPY209.65 from JPY210.19.