Why Might the USDJPY Rally be Short Lived?

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.



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Written By David Rodriguez, Currency analyst for DailyFx.com
[/B]To contact David about this or any other articles he has authored, email him at <[email protected]>[/I]