(Bloomberg) — Yen traders are ramping up options market activity ahead of key US inflation data, turning to derivatives for flexibility amid a lack of consensus on the currency’s direction.
Dollar-yen’s one-week option implied volatility, a measure of expected price swings that directly drives up the cost of options contracts, rose for a second straight day on Wednesday, after falling in the previous five sessions. That’s because traders are positioning for Wednesday’s US inflation report, which is expected to shape the Federal Reserve’s monetary policy outlook and the greenback’s trajectory. Volatility in longer-term tenors also ticked higher.
That heightened volatility reflects a split market. In shorter maturities, lingering fear of joint US-Japan intervention has kept dollar-yen puts trading at a premium over calls, reflecting demand for downside protection in case of a sudden drop. Farther out, however, investors are continuing to buy calls to target renewed dollar-yen gains.
“The market is paying for flexibility rather than conviction,” said Ivan Stamenovic, head of Asia Pacific G-10 currency trading at Bank of America Corp. in Hong Kong. “This reflects both risk around the data print and lingering sensitivity to another intervention.”
The past two weeks have been turbulent for dollar-yen. The pair tumbled to near 155 per dollar following a joint intervention by the US and Japan to bolster the yen, their first coordinated yen-buying operation since 1998. It resumed its climb toward 160 shortly after, putting traders on watch for further official action.
Options traders at Societe Generale SA and Bank of America said last week citing flows that investors were divided over dollar-yen’s direction. Citigroup Inc. shares a similar view.
“Directional flows in the short-term have been skewed for yen strength mainly via leveraged structures,” said Nicky Lam, a director in Citi’s G-10 FX options trading team in Singapore. “Medium term we continue to see demand for dollar-yen calls.”
Nomura International Plc sees that same caution playing out in the spot market.
“Hedge funds seem to be very lightly positioned,” said Antony Foster, head of G-10 spot trading at Nomura International Plc in London. “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.”
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