Deutsche Bank entered up to USD1 billion (notional) of two-week U.S. dollar/Japanese yen 25-delta risk reversals Tuesday on behalf of a client, according to rival traders in London. A Deutsche Bank trader acknowledged the bank had executed a large customer trade where it bought upside dollar calls/yen puts struck at JPY133.85 and sold downside dollar puts/yen calls struck at JPY130. Spot was JPY131.5 Wednesday and had been as much as a full yen higher the previous day. The Deutsche Bank official declined further comment.
Traders said the transaction was entered late in the day on Tuesday, at around 4 p.m. London time, leading to what they described as a "messy" execution that forced volatility higher. One-month dollar/yen implied vol began the day at 10.2% and jumped as high as 10.85% because of the activity, according to traders in London. "They certainly didn't choose the most liquid time; but if the customer called at that time, the only way they can do it is a messy way," noted one trader.
Others said the trade pays off if the yen weakens in advance of next month's fiscal year-end in Japan, as expected. One trader said Japanese monetary officials, who have already expressed their view for a weaker yen, would especially like to see that happen by Japanese year-end at the end of the month, because that would increase the value of foreign-denominated assets.