TOKYO (Reuters) - Once known for its safe-haven characteristics of appreciating fast and depreciating slowly, the yen is being treated in a diametrically opposite fashion by an options market that is pricing in faster falls than gains in the Japanese currency.
As the yen buckles under the Bank of Japan’s massive money printing, just about every market player expects a weaker yen but the pricing in options suggests the fall could be even faster than anticipated.
“Historically the yen has been a safe-haven currency, but I think the times have changed,” said a trader at a Japanese bank.
Safe-haven asset prices tend to jump during times of crisis or acute uncertainty, and decline more gradually once the source of tension gives way to greater optimism.
Over the past month, the Japanese currency weakened far by beyond what many analysts had expected, sliding from around 109 yen per dollar to 119 after the BOJ’s surprise expansion of its bond purchasing strategy.
In a Reuters poll in November, the median forecast was 112.52 for one month ahead and even 114.16 for six months ahead. FXJPY
The sharp moves rattled the option market.
Traders have to pay a premium for owning options that entitle them to buy dollars at a pre-determined price, and those premiums have risen sharply relative to that of dollar puts, or the right to sell dollar. Risk reversal spreads show that the price of dollar call options are higher than those of dollar puts.
The risk reversals on long-term options, such as one-year JP1YRR=FN and three-year JP3YRR=FN, are now in favor of dollar calls.
This is only the second time that this has happened since the phase of acute yen weakness in late 2012 and early 2013, when the market anticipated the aggressive monetary easing that the BOJ undertook in April 2013.
Implied volatilities JPYVOL on dollar/yen options have also shot up as traders price in bigger price moves.
“Market participants have been expecting the yen to decline on monetary policy divergence, but they have expected a slower fall. Thee BOJ’s easing led to faster fall. It is the speed that the option market is wary of,” a currency option dealer at a European bank in Tokyo said.
Fuelling the rise in risk reversal spreads is buying of dollar calls by Japanese importers.
Typically, they had bought dollar/yen calls with a knock-out clause, meaning that their rights to buy disappeared when the dollar rose beyond their expectations, forcing them to buy the same product again at a higher price.
Editing by Simon Cameron-Moore