Options traders are less bearish on yen
Currency options traders grew less bearish on the yen in the past week as they sought to protect themselves from a possible rebound in the Japanese currency from a four-year low.
By Agencies |
NEW YORK: Currency options traders grew less bearish on the yen in the past week as they sought to protect themselves from a possible rebound in the Japanese currency from a four-year low.
The premium that traders must pay for options granting the right to buy yen for dollars has tripled in the past week, rebounding from a three-month low touched on January 23. The yen touched 122.19 per dollar on Monday, the weakest since 2002, on speculation investors will borrow at Japan���s low rates and invest the funds in higher-yielding currencies, in a practice known as the carry trade.
Some investors are tempering their pessimism toward the yen as European officials have said they may try to make the yen���s decline a focus at next month���s meeting of the Group of Seven major industrialised nations. ���The carry-trade players seem to want to hedge their position in the dollar-yen,��� said Naomi Fink, a senior currency strategist at BNP Paribas in New York.
���They are buying yen calls,��� which are options giving the right to purchase yen, she said. The so-called risk reversal rate for one-month options on the yen is minus 0.675%, after shrinking to minus 0.2% on January 23, the skimpiest premium since October 16.
A smaller value indicates increased demand for yen calls over yen puts. Puts are options giving the right to sell an asset, and calls give the right to buy. ���The dollar-yen risk reversal levels reached an extreme,��� said Fink. BNP predicts a yen advance to 118 per dollar by March 31. In another sign the yen may be ripe for a rebound, futures speculators held record bets last week on a yen decline.
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Futures wagers on a drop in the yen exceeded those on a gain by a record 164,860 for the week ended Jan. 23, beating the prior high of 138,146 so-called net shorts a week earlier, US Commodity Futures Trading Commission data showed on January 26. The yen fell on Monday after a Japanese government report showed a drop in retail sales last month, cooling speculation the Bank of Japan will lift its benchmark rate from 0.25%, the lowest among major economies. German finance minister Peer Steinbrueck said he will press to have the yen included in the final communiqu�� the G-7 releases at its meeting next month. The euro set a record high 158.62 yen last week. ���There is a risk of an unwinding of the carry trade,��� said John Zafirelis, an options dealer at Forex Capital Markets in New York. ���The move could be quite violent, so options prices have been bid up.���
A yen rebound may damp volatility in options on the currency, Fink said. As the yen has weakened, volatility on yen options has climbed from last month���s 10-year low. Implied volatility for one-month options on the dollar-yen rate has climbed to 7.1%, after dropping to 6.05% on December 25, the lowest since 1996. Implied volatility, which traders quote as part of pricing options, is a measure of expected swings in exchange rates.
Volatility may decline again in coming weeks as the dollar- yen exchange rate returns to a lower trading range, she said. ���People are betting on volatility not returning,��� said Fink at Paribas.
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