Yen Hedging Cost Jumps to Three-Year High on Fragmented ForecastBy
Banks’ end-2017 dollar-yen predictions range from 100 to 128
Volatility curve remains inverted as near-term risks persist
As analysts spar over the yen’s direction this year, investors are paying the price.
The cost to hedge against fluctuations in the Japanese currency over a year using options has surged to the highest level in more than three years amid a lack of consensus on where it’s headed. Global banks’ predictions for the yen in a Bloomberg survey range from a call for a 14 percent rally from now through 2017 to that for a 9 percent slump.
The yen’s one-year implied volatility against the dollar, a key component of option prices, rose 54 basis points this week to 12.40 percent Wednesday, a level unseen since September 2013. The measure rose to 43 basis points above actual spot-market volatility, the widest gap in more than a month.
Even as shorter-end option prices trade close to the past year’s averages, the volatility curve has shifted higher since the beginning of this year. Still, it remains inverted as front-end prices have risen more. The one-week measure rose 1.5 percentage point today to 14 percent ahead of U.S. President-elect Donald Trump’s first press conference.
Options that protect against dollar declines against the yen were in demand this week as investors sought to hedge their dollar-long positions in the spot market, whereas trading in longer tenors was mixed, according to traders in London.
- NOTE: Some information comes from FX traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly