Traders Stake $12 Billion on Dollar Extending Gains Versus Yen

  • Demand for upside exposure through options increases
  • Technical charts, momentum indicators favor greenback

Why Everyone Is Watching the VIX Now

Investors bet at least $12 billion this week on the dollar extending its rally against the yen, as the odds improve for a Federal Reserve rate increase next month and technical charts favor bulls.

The options bets on gains staked this week were for dollar-yen to rise as high as 133.00 by next year, according to data from the Depository Trust & Clearing Corporation compiled by Bloomberg. The greenback climbed to its highest against the yen since mid-March on Tuesday, as the chances of a Fed move in June rose to 81 percent from 68 percent last week, based on overnight indexed swaps and the Fed funds effective rate.

The dollar has broken above the top of a chart trendline that has capped it against the yen throughout the year, after comments on Monday by Cleveland Fed President Loretta Mester, a known hawk. The pair extended the rally on Tuesday and rose to a high of 113.86 as of 11:45 a.m. London time.

Technical momentum indicators, such as moving average convergence divergence or MACD, and slow stochastics, remain supportive of further upside, suggesting that a test of March highs above 115.00 per dollar could be on the cards.

On top of the latest surge in the cash market, investors are looking to add upside bets through options, according to foreign-exchange traders across Europe. Vanilla calls and call spreads have been in demand on over-the-counter transactions, said the traders who asked not to be identified as they weren’t authorized to speak publicly.

Data from the Depository Trust & Clearing Corporation shows dollar-topside bets outweigh bearish views this week. That includes $700 million on the 115.00 level, another $600 million going through on 116.00 calls, and $140 million on the pair reaching 133.00 within the next year.

Yen haven demand has also lost traction, as the French election result provided a market-friendly outcome, as shown by risk reversals, a gauge of market positioning and sentiment.

While demand for dollar-yen puts over the next month still outweighs that for calls, it does so at the lowest in almost two months. Dollar puts trade on a 38-basis-point premium over calls on the one-month tenor, which compares to an average in the past year of 105 basis points.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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