Dollar-Yen Options Traders Shift Focus to Rangebound Trading Before BOJ Hike
In anticipation of the expected Bank of Japan (BOJ) interest rate hike on Friday, options traders are adjusting their strategies.
Downside Bias Fades
Prior to this week, investors favored downside put options, anticipating a further decline in dollar-yen (USD/JPY) following the BOJ's rate increase. However, with the hike almost fully priced in, traders are shifting their attention to strategies that benefit from a narrow trading range post-decision.
Implied Volatility Declines
Dollar-yen's implied volatility, a measure of expected price movement, has fallen significantly in recent days, suggesting reduced uncertainty post-inauguration.
Hedging Costs Narrow
The premium to hedge downside USD/JPY risk over the next month has also declined, indicating less interest in further near-term declines.
BOJ Hike Priced In
Swaps pricing suggests that a 25-basis-point BOJ hike is highly likely, following the central bank's recent hawkish stance. This has stalled dollar-yen's downward momentum.
Dovish Hike Risk
Some analysts warn that a dovish hike, signaling constrained downside for USD/JPY, could push the currency pair higher. This possibility is being explored by a few funds.
ERKO Demand Subdued
Demand for European reverse knock out (ERKO) options, which become invalid upon reaching a trigger price, remains muted. This indicates limited interest in upside USD/JPY structures.
Overnight Hedging Costs Low
Yen overnight hedging costs are at their lowest since June, reflecting expectations of a tight post-BOJ trading range.