Hedge funds and other currency investors are increasing their use of options to navigate heightened uncertainty around the yen ahead of key US inflation data, with traders split over whether the dollar is poised for further gains against the Japanese currency, according to a report by Bloomberg.
One-week implied volatility for dollar-yen rose for a second consecutive session on Wednesday after declining for five straight days, signalling increased demand for protection around the US inflation report. Volatility has also edged higher across longer-dated options.
The data is being closely watched for clues on the Federal Reserve’s interest-rate outlook and the likely direction of the dollar. With investors lacking a clear consensus on the next move in dollar-yen, options are providing a way to maintain exposure while limiting outright directional risk.
In the short-dated market, dollar-yen puts are trading at a premium to calls as investors seek protection against a renewed surge in the yen. That caution reflects concern that US and Japanese authorities could intervene again following their recent coordinated action.
At longer maturities, however, demand for dollar-yen calls remains strong, suggesting some investors continue to position for the dollar to regain ground against the yen.
“The market is paying for flexibility rather than conviction,” said Ivan Stamenovic, Bank of America’s head of Asia Pacific G-10 currency trading in Hong Kong, pointing to uncertainty surrounding both the inflation data and the possibility of further official intervention.
Dollar-yen has been particularly volatile in recent weeks. The pair dropped towards JPY155 following the first coordinated US-Japan intervention in the yen market since 1998, before recovering and moving back towards JPY160.
The intervention has left traders wary of betting aggressively on yen weakness, even as the currency remains under pressure from broader interest-rate and growth differentials.
Nicky Lam, a director on Citigroup’s G-10 FX options trading team in Singapore, said short-term flows had been tilted towards yen strength, particularly through leveraged structures. Medium-term investors, by contrast, continued to show demand for dollar-yen calls.
The split is also visible among hedge funds. Nomura International said funds appeared to be carrying relatively light outright positions, reflecting the difficulty of establishing a high-conviction trade while both US economic data and the prospect of official intervention remain major market risks.
