| NEW YORK, April 3
NEW YORK, April 3 Expectations the Bank of Japan
will unleash sweeping new stimulus measures to dig the country
out of decades of deflation has crushed the yen, but its darkest
days may be over.
Expectations of aggressive action from the BoJ since late
last year may have been overly ambitious, especially with the
central bank historically cautious with its policy endeavors,
analysts say, adding that the yen's weakness may have gotten
ahead of itself.
The dollar has risen 7.2 percent against the yen so
far this year and roughly 22 percent since early November.
However, dollar/yen hit a one-month low on Tuesday and the
options market shows demand remains skewed toward protection
against further dollar weakness.
The BoJ, when it concludes its two-day policy meeting on
Thursday, is widely expected to announce plans to ramp up its
bond buying and extend the maturities of the bonds it purchases
under new Governor Haruhiko Kuroda.
However, most analysts contend aggressive action by Japan's
central bank is already priced into the yen, and that investors
may even be expecting too much. The dollar is down considerably
from its three-and-a-half year peak of 96.71 yen reached on
March 12, and it has not broken 96 in intraday trading since
Should any Bank of Japan stimulus proposal fall short of the
lofty expectations, that would serve as a surprise for those
expecting more yen weakness.
Investors have recently been paring hefty bets in favor of
the greenback after a round of soft U.S. economic data called
into question the strength of the world's largest economy.
"We are currently neutral on the dollar versus the yen and
it has likely hit its peak," said Anjun Zhou, managing director,
head of multi-asset research at Mellon Capital in San Francisco.
In the options market, risk reversals, a broad gauge of
currency market sentiment, show options investors are seeking
protection against a drop in the dollar.
Risk reversals measure the relative demand for options on
the dollar rising or falling against the yen.
Three-month risk reversals are biased to puts,
the right to sell dollars at a future date. Prior to March they
were skewed toward calls, the right to buy dollars.
YEARNING FOR YIELD
Yields on benchmark 10-year U.S. Treasury securities have
fallen in recent days following weak data from the United States
and China, the world's second-largest economy.
Yields differentials between U.S. Treasuries and government
bonds in Japan, one of the few major world markets with less
attractive yields than the U.S., are a primary driver of
dollar/yen price action. The greenback usually falls out of
favor against the yen when there is a drop in Treasury yields,
which move inversely to prices.
"U.S. data has been weak for 1-2 weeks now, making the link
to U.S. yields at the low end of the recent range, which has
been a drag on dollar/yen," said Jens Nordvig, global head of FX
strategy at Nomura Securities in New York.
"Meanwhile, there is nervousness about the BoJ this week and
some worry that expectations are too high," said Nordvig, whose
three-month forecast for dollar/yen is at 95.
Implied volatility, or "vol," a measure of expected price
swings and a gauge of option pricing, on three-month dollar/yen
options traded at 11.188 percent on Wednesday, not far from its
2013 intra-day high on Feb. 6 at 12.738 percent. High volatility
implies investors expect more extreme price swings and investors
are expected to pay more for an option.
With dollar long positions - bets made on a currency rising
- at extremely lofty levels, the scope for further gains has
also limited the greenback's upside.
In the week ended March 22, currency speculators increased
bets in favor of the dollar to the largest since the week ended
July 17, 2012, according to data from the Commodity Futures
"Front-end risk reversals are reflecting stretched
positioning and the fact that a lot is expected out of the BoJ,
making it harder for them to surprise to the upside," said John
Hopkinson, head of FX quantitative and options research, at BofA
Merrill Lynch in New York.