Market News

BY  David Finnerty and Ruth Carson

(Bloomberg) -- It took just a week for cracks to appear around wagers for a stronger yen in the $300 billion-plus currency options market.

Strong US inflation data and the prospect of a deal to end the war in Ukraine have dented the yen’s appeal, according to Barclays Plc. That’s after hawkish comments from a Bank of Japan official and upbeat wage data last week boosted the currency to its strongest level this year.

Moves in the options market are beginning to reflect bearish market views.

Notional euro-yen trades worth 50 million euros ($52.2 million) or more showed a five-to-one ratio for calls to puts on Wednesday, underscoring interest in wagers for a weaker yen, data from The Depository Trust and Clearing Corporation show. Aussie-yen options revealed a similar trend, with notional trades of A$50 million ($31.5 million) and larger showing around a two-to-one position of calls to puts.

The wagers in both these options markets were closer to even last week.

“The fairly sharp move in both dollar-yen and cross-yen spot seems to have resulted in a lot of investors unwinding their dollar-yen and mostly euro-yen downside positions,” said Niraj Athavle, head of APAC sales and marketing at the JPMorgan Chase & Co. in Singapore.

Positive headlines around geopolitics and anticipation of sticky inflation in the US seem to have led investors to re-evaluate their yen option positions, he added.

A hot US inflation print has reduced market expectations of Federal Reserve rate cuts to just one this year, a backdrop that favors the dollar. The possible end of the war in Ukraine would also reduce the demand for haven assets like the yen, while boosting the euro due to improving geopolitical stability in the region.

The premium to hedge the yen rallying over the next month versus the greenback or the euro fell for the third day Wednesday, in yet another sign that bullish option bets on the currency are waning.

“We have seen risk reversals come off with the rally in spot,” Saurabh Tandon, global head of foreign-exchange options at Standard Chartered Bank in Singapore said, referring to the falling premium to protect against yen strength in the options market.

“Front end is obviously coming off quicker as people were looking to protect their downside views,” Tandon said.

Global Shift

Investors in Asia are not the only ones questioning their yen trades. A similar pattern is emerging in Europe as traders switch their attention away from the BOJ.

“This week sentiment has shifted away from Japan to a potential Ukraine-Russia ceasefire as well as strong US labor and inflation data,” says Jerry Minier, co-head of G10 FX trading at Barclays Plc in London. “While we have not seen close-outs of previously purchased yen calls, we have moved away from most of the strikes and new trades point in the other direction.”

Expectations of a weaker yen are also evident among Japanese institutions.

Fukuoka Financial Group Inc. expects yen to weaken to 157 per dollar, a level last touched in mid-January. “People had no choice but to unwind the positions as the dollar was bought and dollar-yen rose, plus holding yen longs for a while is too expensive,” said Tohru Sasaki, a strategist at the firm.

While bearish yen bets grow, there aren’t any signs of heavy selling in the spot market yet. The currency was hovering around 154.05 per dollar on Thursday, near its lowest level in a week.

--With assistance from Mia Glass.