Dollar-Yen Options Traders Shift Strategy Ahead of BOJ Rate Hike
Traders in dollar-yen options have adjusted their strategy following the inauguration of President Trump and ahead of an expected rate increase by the Bank of Japan (BOJ) on Friday.
Shift to Rangebound Volatility
Previously, investors favored downside put options that gain value if dollar-yen falls. However, with expectations of a BOJ hike now largely priced in, traders have shifted their attention to strategies that profit from a tight range in the currency pair post-rate decision.
Dollar-yen implied volatility (vol) has declined, indicating reduced expectations of significant future movement. Senior FX spot trader at Nomura Singapore, Graham Smallshaw, attributes this to the reduced uncertainty surrounding Trump's tariff threats since his inauguration.
Waning Downside Interesse
The premium to hedge dollar-yen's downside risk over its upside has fallen, suggesting diminished interest in the pair declining further in the near term. Swaps pricing indicates a high probability of a 25 basis point BOJ hike, which has temporarily halted dollar-yen's downward momentum.
Impact of a Dovish Hike
Analysts caution that investors may be disappointed if the BOJ rate increase is accompanied by a dovish stance, which could limit dollar-yen's potential decline.
ERKO Options Demand
Demand for European reverse knock out (ERKO) options, which expire if a trigger price is reached, has been limited, indicating a lack of strong conviction in a significant dollar-yen rally.
Conclusion
Traders in dollar-yen options have shifted their strategy towards expecting a rangebound market after the BOJ rate hike. While some interest in upward-biased ERKO structures has emerged, the overall sentiment remains cautious.