Yen Bears Run Into $3 Billion Options Wall at 120 Per Dollar

Traders counting on pushing the yen beyond 120 per dollar for the first time since July 2007 are running into a wall of options centered around the price.

There are $3.01 billion of over-the-counter foreign-exchange options on the dollar-yen with a strike price of 120 that expire today at 10 a.m. New York time, according to Depository Trust Clearing Corp. data tracked by Bloomberg. The strike price is the exchange rate at which call option holders can buy the underlying currency and put owners can sell.

“These round figures are often significant purely for psychological reasons, and a lot of order flow will concentrate around them, whether it’s for hedging exports or whatever,” said John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “We’ll see after today as this European Central Bank meeting is pretty significant, as is the U.S. payroll data tomorrow. But the 120 level could be interesting. It could be sticky.”

The dollar reached the highest level since July 2007, as analysts forecast that U.S. job growth will accelerate, boosting the economy while Japan’s remains mired in recession. Signs of strength in the American economy are buoying the dollar as the Japanese currency and the euro come under pressure as their central banks expand stimulus to spur growth.

Option Barriers

Some options contain so-called barriers, causing the contract to either expire or to be activated if the pre-set exchange-rate level is reached. These types of contracts can also cause traders to attempt to push a currency through or away from barrier triggers. The barriers are often used as they reduce the cost of the strategy because they decrease the odds the options will be profitable.

The dollar rose 0.1 percent to 119.88 yen at 9:13 a.m. New York time, after reaching 119.98, the strongest level since July 2007. The yen traded at 148.44 per euro.

The greenback has appreciated 14 percent against the yen this year as the Federal Reserve moved closer to raising interest rates while the Bank of Japan increased the scale of its bond purchases as recently as October.

U.S. employers added 230,000 workers in November after hiring 214,000 the previous month, according to a Bloomberg News survey of economists before tomorrow’s Labor Department report. Data today showed initial jobless-benefit claims dropped last week.

The dollar may run into some profit-taking in the near term, given the currency was “overbought,” according to Luc Luyet, a senior market analyst at Swissquote in Gland, Switzerland.

‘Psychological Threshold’

“Prices are now approaching a strong resistance area given the psychological threshold at 120 and 124.14, which is likely to curb some of the yen selling pressures,” Luyet wrote in an e-mailed note. “There is no sign to suggest the end of the long-term bullish trend in the dollar versus the yen.”

Europe’s shared currency rallied from a two-year low today after ECB President Mario Draghi said policy makers will wait until next quarter before assessing whether additional stimulus measures are required. The bank kept its main refinancing rate at a record-low 0.05 percent, as predicted by all economists in a Bloomberg News survey.

The ECB today and tomorrow’s U.S. payrolls data will prove primary fundamental factors driving the long run path of the currency, according to Hardy, who’s one-year forecast for dollar-yen is 130.

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