In an otherwise quiet week fx traders in Singapore last week reported strong demand from hedge funds buying short-dated euro calls/yen puts, which boosted volatility. "A few funds are creating a big effect," said an options trader at a European house in the Lion City, noting that their actions were magnified by the thin post-holiday markets.
In a typical trade, funds were buying short-dated euro calls/yen puts, with maturities from two-weeks to one-month with strikes around JPY120. Spot was at JPY119 last Thursday. "Everyone's been buying at JPY120 or above," said an options trader at Bank of America in Singapore.
The options trader at the European house added: "there is still plenty of bad news coming from Japan," explaining the demand for euro calls. Trades were typically in notional sizes of up to EUR100 million. Anne Sanciaume, foreign exchange strategist at Lehman Brothers in London, attributed the rally in the euro to the introduction of notes and coins in the European Union as well as to continued yen weakness. "Implied vol has gone up a whole point," she said, noting that one-month implied volatility has jumped to 13% from 12% over the course of one week. One-month historical volatility is much lower, she noted, at 9.6%. "There's still upside potential for euro/yen volatility." Sanciaume forecasts further yen weakness will drive up vols to around 13-14% in three months. Lehman's three-month forecast for the euro/yen pairing is JPY126.40.
EUR/JPY Spot & One-Month Implied Volatility