Wednesday, September 15, 2010

The BoJ Selling the Yen by the Trillions: FXY Straddles +172%

This is the current status, as on 9:35AM:

I am thinking on selling September for now [update: but I am holding as Bloomberg reports that ter BoJ will intervene for a 2nd day]. Looks like the BoJ will defend the 83 line hard, if this is the case, then the Yen will be in a trading range and straddles won't do well.

Now the ball is on Bernnake's court. The US cannot afford the dollar to rise, and neither can Europe let the Euro rise, so... this will be fun. The best of all, is that options are cheap on currency ETFs so moves required are small. Currency wars are great for straddles.

Please remember than 90%+ of options expire worthless. You need these big wins once in a while.

Computed with StraddlesCalc Tool

Credit Suisse today says that the Yen might continue to stregnth in the short term, driven by spulation, but wil not in the long term:

"Why yen appreciation is unlikely to continue: We believe speculation could drive further yen appreciation over the next month or two, but over the period of 3-9 months from now, fundamentals are unlikely to allow the yen to climb further. This is because if the Fed, responding to heightened concerns about a double-dip recession in the US, were to carry out additional monetary easing, we believe the impact of quantitative easing would not be felt immediately due to the deterioration in the US financial system's intermediary function, leaving only limited pressure for a weaker dollar. If US commercial banks begin to pump low-interest funds into government bonds, long-term interest rates could come under increased pressure. But additional monetary easing could also help improve business sentiment, driving a further drop in bond prices (and rise in interest rates), given that an economic slowdown appears to have already been discounted in current bond prices. This means that if the Fed were to carry out additional monetary easing after it became clear that the economy was not likely to deteriorate further, the result could push up long-term interest rates, thus leading to a strengthening of the dollar (and a weakening of the yen). In the best-case scenario for the stock market, deterioration in US economic indicators would stay within a limited range, while the Fed carried out further monetary easing, ideally within the current year. This would raise expectations that the US economy was turning a corner, which in turn would help to strengthen the dollar (and weaken the yen). Even if the Fed were to not opt for further easing, assuming economic indicators do not fall significantly, we believe exchange rates could stabilize at current levels".

Further straddles at this point, for October, might actually work.

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