France‘s no-confidence vote is emboldening currency options traders to short the euro against the yen.
Euro-yen options trading on the Depository Trust & Clearing Corporation has surged recently. Since the start of November, there have only been three trading days when the trading volume has exceeded US$3 billion ($4.03 billion), with two of these being in the last week.
The currency pair’s three-month implied volatility, a measure of its expected future movement over that period and which is impacted by demand for options, is hovering near its highest level since August.
“Short euro-yen has taken over from short dollar-yen in the last couple of trading days particularly from the macro community,” according to Graham Smallshaw, senior FX spot trader at Nomura Singapore. In the option markets, “cheapened downside structures are favoured such as put butterflies or dual digis rather than outright puts,” he adds.
Macro hedge funds attempt to profit from broad market swings caused by political or economic events. They are betting the Japanese currency will advance further amid rising market speculation that the Bank of Japan (BOJ) will raise rates by a quarter point this month.
Hawkish comments from BOJ Governor Kazuo Ueda last week has further helped to bolster the yen’s attractiveness. Meanwhile, weak regional economic data was already making the euro an attractive currency to sell for investors. Fears that Wednesday’s no-confidence vote in France may topple the country’s government are adding to reasons to sell the currency.
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The yen is trading within striking distance of its strongest level against the euro since December 2023. However, despite the looming French vote, short-term bearish option trades aren’t the only ones that macro funds have been putting on.
“With spot increasingly choppy due to heightened volatility post US election and as the year comes to a close, premium is being spent on both short- to medium-term options structures, which capture the US presidential inauguration and potential French election woes, as well as persistently poor sentiment emanating from the Eurozone,” says Smallshaw.
Nomura isn’t the only financial institution seeing demand for euro-yen downside trades. JPMorgan Chase Bank has also seen a change in investors’ preferences ahead of US President-elect Donald Trump’s inauguration next month.
“While macro funds have mostly traded with a short dollar-yen bias, with added uncertainty coming from the dollar side due to a change of administration there, their preference has become more to buy the yen versus other currencies, especially the euro,” says Niraj Athavle, the bank’s head of sales and marketing Singapore and global clients APAC.
US employment data due Dec 6 is another event risk encouraging funds to shy away from trades that involve shorting the US dollar, as the report may impact the willingness of US Federal Reserve officials to lower interest rates at the December meeting.
