* Dollar rises to 2-month high vs yen even as implied
* Diverging outlooks for U.S./Japan monetary policy favour
dollar over yen
By Lisa Twaronite
TOKYO, Nov 15 A slide in the yen to a two-month
low against the dollar on Friday is likely to have further to
go, as the options market shows some investors betting on dollar
strength in the weeks ahead.
One-month risk reversals, which gauge demand for whether
investors prefer to bet on a rising or falling dollar against
the yen, turned last week to favour dollar calls -- bets the
currency will rise -- instead of puts earlier this month, for
the first time since late May.
The dollar rose as high as 100.315 yen on Friday,
even as implied volatilities on dollar/yen options eased to
around 8.88 percent from a one-month high of 9.80 percent on
Tuesday and Wednesday this week.
"Many people had thought it would be difficult for the
dollar/yen to rise above 100. The year-end period is also
generally speaking not a good time to volatility so many people
had been selling volatilities," a currency options trader at a
European bank said.
Some market participants bought dollar calls to cover short
positions but as the market tends to be quiet during year-end,
people are cautious about buying volatility too much, he added.
Still, the greenback could face resistance near its
September high around 100.60 yen, and much depends on the
direction of U.S. Treasuries, said Marc Chandler, global head of
foreign exchange strategy at Brown Brothers Harriman. The 60-day
correlation between U.S. Treasuries and the dollar-yen is near
0.62, Chandler said in a research note.
Going forward, diverging monetary policy outlooks in the
United States and Japan generally favour a stronger dollar, as
the yield differential between U.S. Treasury notes and Japanese
government bonds could widen.
As of the U.S. close on Thursday, the 10-year yield
differential was around 210 basis points. It rose as high as
216.5 basis points earlier this week, its widest since September
- which was its widest since April 2011, according to Thomson
Reuters Datastream data.
The U.S. Federal Reserve is on track to taper its monthly
purchases of $85 billion in assets, with most investors
expecting the central bank to begin paring by March 2014.
By contrast, the Bank of Japan is expected to maintain its
ultra-easy stance -- and possibly ease further -- as it aims to
achieve 2 percent inflation within two years.
"JGB yields remain mostly unchanged while U.S. yields
resumed their uptrend, basically because of
stronger-than-expected U.S. data," said Naomi Muguruma, a senior
fixed-income strategist at Mitsubishi UFJ Morgan Stanley
On Thursday, Muguruma noted that U.S. yields came down after
Janet Yellen, nominated to be the next Fed leader, raised
expectations the central bank will maintain its economic
But an improving U.S. economy lessens the need for stimulus.
Recent data has surprised on the upside, including a
greater-than-expected rise in October nonfarm payrolls.
"We think tapering will start in March next year, so we have
to see how strong the U.S. data will be," said Muguruma, adding
that she believes the 10-year U.S. Treasury yield
will rise near 3.0 percent by March, from the U.S. close of 2.70
percent on Thursday.
JGB yields will "more or less trade sideways" for the rest
of 2013, she said, with the 10-year JGB yield
likely rising toward around 0.8 percent by the end of Japan's
fiscal year in March, from 0.630 percent on Friday.