Dollar/Yen Volatility Steadies After Spike

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Dollar/Yen Volatility Steadies After Spike

The majority of trades going through the quiet market last week originated from customers and banks maintaining their books. "The market is flow driven right now and there won't be much opportunity to take speculative risk for several weeks," said Ronald Leven, currency strategist at Lehman Brothers in Tokyo. He added that corporates with receivables and payables were in the market buying puts or calls on the yen depending upon their underlying position and banks were active in foreign exchange options in the short end, primarily to square positions.

One-month dollar/yen volatility shot up to 15% from 10% the previous Wednesday and then stabilized at 11% on Thursday. Motoshi Imura, senior manager and global head of currency options at the Bank of Tokyo-Mitsubishi in Tokyo, said volatility shot up as traders looked to adjust their positions. Much of the buying was seen on one-month at-the-money forwards around JPY118.60, but Imura also noted some purchasing of one-month calls with strikes at JPY116. Spot was trading at JPY119.30 on Thursday.

A dealer in Tokyo said that typical positions in the inter-bank market were USD20-30 million. He continued that some foreign-based funds are still bullish on the dollar against the yen and may look to enter trades once liquidity improves in the coming weeks. These funds believe Japan's fundamentals are still the biggest cause of concern, and feel that the yen will depreciate.

 

Source: J.P. Morgan Chase Charima@chase.com

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