The US dollar – Japanese Yen currency pair (USDJPY) has rallied significantly to start the week’s currency trading, but it may continue to fall through the coming months on extremely one-sided forex options trading.
Speculators and corporations continue to bet/hedge aggressively on further Yen strength. According to Over the Counter (OTC) Japanese Yen forex options, traders are paying a staggering 5 percentage point premium for USDJPY puts—a clear signal that they expect the pair to fall further through the life of the options contract (3 months). We saw similarly one-sided options markets in August of 2007. In this instance, the USDJPY set fresh 13-month lows of 113.67 before posting a 430 point recovery in the subsequent two months of trading. A dramatic 1000+ point drop in the third month nonetheless made those expensive USDJPY put options extremely profitable—more than proving their worth to the forex options trader.
The USDJPY has fallen a long way since the sentiment extremes seen in 2007, and recent options price action certainly suggests it may fall further. If we see anything like we did in August-November, 2007, the USDJPY may stage a respectable relief rally through short/medium term price action. Yet risks remain weighted to the downside on aggressive purchases of USDJPY put options across all relevant expiration dates. Unless we see a noteworthy improvement in USDJPY risk reversals, there may be relatively little in the way of further USDJPY depreciation through the coming months of currency trading.
Written By David Rodriguez, Currency analyst for DailyFx.com
To contact David about this or any other articles he has authored, email him at drodriguez@fxcm.com
