The premium for one-month options to buy the yen against the dollar versus those to sell rose to 70 basis points today, the most since May 19, according to data compiled by Bloomberg on 25-delta risk reversals. The premium for one-week options climbed to 107.5 basis points, the most since Feb. 6.
The yen completed yesterday its biggest two-day gain since February after Bank of Japan Governor Haruhiko Kuroda said the central bank will closely monitor the exchange rate and Prime Minister Shinzo Abe said its weakness is hurting small companies and households. It traded at 108.48 per dollar at 2:16 p.m. in Tokyo after reaching 110.09 per dollar on Oct. 1, a level unseen since August 2008.
“Risk reversals are showing the potential for a further retracement of the dollar’s excessive gains,” said Shusuke Yamada, a Tokyo-based currency strategist at Bank of America Merrill Lynch. Amid a growing chorus of voices against too much yen weakness, “it’s easy for the yen to strengthen,” he said.
The yen slumped 5.1 percent versus the dollar in September, its worst monthly performance since January 2013, as the BOJ pressed on with its unprecedented monetary easing, while the Federal Reserve withdrew stimulus.
The yen will end the year at 109 per dollar, according to the median estimate of analysts surveyed by Bloomberg News. Bank of America Merrill Lynch forecasts 108.
“The yen is a bit undervalued, so it’s natural to expect a correction,” Yamada said. “It would be normal for it to strengthen to 107 or 106 per dollar considering the size of its recent decline.”
Source: Bloomberg (08 Oct 2014)
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