FX Options Traders Get Wake-Up Call From Central-Bank Signals

BAML Sees Yen Weakening to 119 Target By Half-Year Mark

The currency world showed signs of emerging from its low-volatility stupor this week after the Bank of Japan and the European Central Bank surprised traders with messages on their bond-buying policy that fueled rallies in the euro and yen.

The BOJ kicked things off Tuesday by cutting purchases of long-dated Japanese government bonds, spurring bets it may also tweak its yield-curve control policy. Then on Thursday, ECB policy makers said they’re open to tweaking policy guidance soon to align it with an improving economy, leading traders to speculate the bank will end its bond buying this year.

On the heels of those developments, the currency-options market kicked into high gear. Euro options transactions reported Thursday to the Depository Trust & Clearing Corp. were more than double the five-day average, while activity in the yen was about 75 percent higher than it’s been. The euro surged Thursday, approaching a four-month high, while the yen touched the strongest level since November.

Burst of Business

Central-bank signals spur demand for FX options

Source: Depository Trust & Clearing Co.

“There’s a palpable feeling that the euro and the yen will be among the best-performing currencies this year,” said Bipan Rai, a foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce. “There’s going to be more demand in the options space to participate in those gains.”

The burst of business in options and the prospect of heightened volatility is likely to be welcome news for currency investors, whose returns suffered last year as volatility tumbled amid well-telegraphed central-bank policy. The JPMorgan FX volatility index, a gauge of three-month implied volatility, this week touched the lowest level since 2014.

“The market is catching on that central banks are going to be adjusting policy this year,” said Rai.

— With assistance by Robert Fullem

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE