(Bloomberg) — Hedge funds are renewing their attack against the yen.
Most Read from Bloomberg
Days after the yen rallied from a 34-year low amid the suspected intervention by authorities to support the currency, leveraged funds have begun re-entering bets it will slump back towards 160 in the coming weeks, according to option traders.
Short-term funds have started buying one- to three-month dollar-yen reverse knock-out call-option contracts, or RKOs, this week which gain in value if the currency pair rises.
“The preference for RKOs clearly shows that the market is circumspect about intervention and as such feels that the move higher in USD/JPY will be a grind at best,” said Ruchir Sharma, global head of FX option trading at Nomura International Plc in London . “A slow move higher might also keep the authorities less keen to intervene.”
Japan’s top currency official Masato Kanda said authorities are ready to take appropriate action anytime whenever it’s necessary, after Bank of Japan Governor Kazuo Ueda beefed up his language on the weak yen on Wednesday. That’s been insufficient to bolster the currency which has fallen 1.6% so far this week.
“The market is betting that USD/JPY is now stuck in a range with topside capped at 160 by the authorities,” Sharma said. “This is best expressed by USD/JPY call RKOs and the market is starting to engage in those flows meaningfully.”
These contracts are different from regular call options as they contain an additional condition that makes the deal worthless if the currency pair hits a so-called knock-out level. According to traders these levels are primarily in the 160.50-161 range, which is above the April 29 high of 160.17.
The demand for RKOs has narrowed the gap between the put and call option pricing to levels last seen in November, as the cost to protect against the dollar’s rally climbs.
Sharma said it would take a meaningful beat on the US inflation data to accelerate the pace of the dollar-yen’s rise. He sees the currency pair’s downside being limited to around 152 by onshore demand for the greenback from retail investors and importers with real dollar needs.
Most Read from Bloomberg Businessweek
©2024 Bloomberg LP
