The options market may be ill-prepared for sharp moves in the US dollar against the yen in the coming weeks, analysts and dealers warn. For the past four months, the dollar has bounced around between roughly 101.75 yen and 106.20 yen, frustrating spot market dealers and lulling options traders to mark down the risk of a breakout, particularly since the year began.
But with the Easter holiday and Japan's fiscal year-end approaching, options traders may not be sufficiently pricing in the risk of a sudden break from those ranges.
"The options market is definitely not prepared for a sudden move to 100 yen," said the chief dealer with a Japanese bank in New York.
The dealer said that Japanese exporters, whose fiscal-year end is March 31, have been predicting a target exchange rate for the dollar of around 104 yen and 105 yen, somewhat lower than a year-ago target between 105 yen and 110 yen.
The market may interpret the current year forecasts to mean that Japanese exporters are better prepared to weather the effects of a weaker dollar. That would in turn give traders comfort in pushing dollar/yen lower without the fear of dollar-buying intervention by Japanese authorities.
That said, implied volatilities in dollar/yen - a guide to the anticipated moves in the pair over a particular timeframe - have slipped too far, understating the case to be made for a wider trading range.
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