3 weeks ago
Yen Traders Use Options for Flexibility Ahead of US Inflation
People who trade money buy and sell dollars and yen, a bit like trading toys at a swap meet.
Right now, traders are unsure what will happen next, so they are buying special "tickets" called options.
These options let them buy or sell yen later at a set price.
A big report about prices in America, called inflation, will come out on Wednesday.
That report could change what the Federal Reserve, America's central bank, does next.
When traders are unsure, these tickets cost more - that is called higher volatility.
Recently, America and Japan worked together to make the yen stronger, pushing it from near 160 down to about 155 per dollar.
The yen then climbed back toward 160, and some traders worry the two countries might step in again.
So short-term traders buy tickets that protect against a sudden yen jump, while longer-term traders buy tickets betting the dollar-yen climb continues.
Basically, traders are paying for flexibility because nobody is fully sure which way the money will go.
Dollar-yen one-week option implied volatility rose for a second straight day on Wednesday ahead of the US inflation report, after falling in the previous five sessions.
In shorter maturities, dollar-yen puts trade at a premium over calls on lingering fears of a joint US-Japan intervention.
In longer maturities, investors continue buying calls targeting renewed dollar-yen gains.
The pair tumbled to near 155 per dollar after the first coordinated US-Japan yen-buying intervention since 1998, then climbed back toward 160.
Banks including Bank of America, Societe Generale, Citigroup and Nomura report a divided market, with hedge funds only lightly positioned.
- Who
- Yen traders at major banks including Bank of America, Societe Generale, Citigroup and Nomura, along with the US and Japanese authorities who intervened to support the yen.
- What
- Traders are ramping up options activity ahead of the US inflation report, with dollar-yen implied volatility rising and positioning split between yen-strength and dollar-yen-gains bets.
- Where
- Global currency markets, with trading desks commenting from Hong Kong, Singapore and London.
- When
- In the sessions leading up to Wednesday's US inflation report, following two turbulent weeks for dollar-yen.
- Why
- The US inflation data is expected to shape the Federal Reserve's monetary policy outlook and the greenback's trajectory, while fears of further joint US-Japan intervention linger.
Yen-Strength (Short-Term) View
Dollar-Yen Gains (Medium-Term) View
Dollar-yen direction
Yen-Strength (Short-Term) View
Short-term flows are skewed toward yen strength, mainly via leveraged structures, and dollar-yen puts trade at a premium over calls on lingering fear of joint US-Japan intervention.
Dollar-Yen Gains (Medium-Term) View
Medium-term investors continue buying dollar-yen calls to target renewed gains, and the pair has already climbed back toward 160 after its intervention-driven drop.
Intervention and positioning risk
Yen-Strength (Short-Term) View
Lingering sensitivity to another joint US-Japan intervention justifies demand for downside protection in the event of a sudden yen jump.
Dollar-Yen Gains (Medium-Term) View
Hedge funds are staying lightly positioned partly because yen dynamics and fundamentals have not changed, with traders reluctant to take strong positions against the Ministry of Finance.
Key facts
- Currency pair
- Dollar-yen (USD/JPY)
- One-week implied volatility
- Rose for a second straight day ahead of the US inflation report
- Yen level after intervention
- Near 155 per dollar
- Yen level after rebound
- Climbed toward 160 per dollar
- Last joint US-Japan intervention
- 1998
- Market stance
- "Paying for flexibility rather than conviction" - Bank of America
- Hedge fund positioning
- Lightly positioned, according to Nomura
- Key event
- US inflation report on Wednesday
Quotes
Ivan Stamenovic
Head of Asia Pacific G‑10 currency trading at Bank of America Corp. in Hong Kong
“Hedge funds seem to be very lightly positioned, part of this is because it’s summer, part of this is the fact that yen dynamics and fundamentals have not changed, and part of this is not wanting to go against the Ministry of Finance.”
livemint.com
“Directional flows in the short‑term have been skewed for yen strength mainly via leveraged structures, medium term we continue to see demand for dollar‑yen calls.”
livemint.com
Sources
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