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Volatility-Starved Yen Traders Feel Chills as Winter Comes Early

David Finnerty
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Volatility-Starved Yen Traders Feel Chills as Winter Comes Early

(Bloomberg) -- Traders searching for potential triggers for a pickup in dollar-yen volatility may have to wait until next year.

The currency pair’s implied volatility has been slipping across the curve amid growing optimism about a partial U.S.-China trade accord. With odds of a no-deal Brexit evaporating, a gauge of the dollar-yen’s expected swings over three months has hit its lowest level since July and looks set for a new 2019-low.

As event risks fall by the wayside, options are indicating a 75% probability that the yen will stay between 105.39 and 110.99 per dollar for the rest of the year, based on a spot reference of 108.65. That spells bad news for yen bulls, some of whom predict it to end the year closer to 100.

Among the most bullish, Morgan Stanley expects a rebound to 101. BNP Paribas SA estimates 102, while Goldman Sachs Group Inc. this month recommended shorting the dollar-yen, with a target of 103, as one of its highest conviction views into year-end.

Yet as they remain optimistic about a rally in Japan’s currency, recent activity from hedge funds and asset managers also shows a lack of conviction in yen trades.

Leveraged funds slashed their net long yen positions by the most since April in the week ended Oct. 15, to just 2,752 contracts, according to the latest data from the U.S. Commodity Futures Trading Commission. Money managers increased their net short yen positions during the week.

With hardly any catalysts to spur a sharp yen move, investor focus in the near-term is on the Bank of Japan’s Oct. 30-31 policy meeting.

There has been some speculation that the central bank will add to its stimulus after Governor Haruhiko Kuroda called for a review on the effect of the global slowdown on prices and the economy at this meeting. Any such move would only undermine the yen.

The BOJ is considering reducing its forecasts for economic growth and inflation this year in a quarterly outlook report to be released at the end of this review, according to people familiar with the matter. A lowering of projections hasn’t prompted action from the central bank on most previous occasions.

Below are the key Asian economic data and events due this week:

Monday, Oct. 28: Japan PPI servicesTuesday, Oct. 29: RBA Governor Lowe speaks, Tokyo CPI, South Korea business surveys - manufacturing and non-manufacturingWednesday, Oct. 30: Australia CPI, Japan retail salesThursday, Oct. 31: Australia building approvals, New Zealand ANZ business confidence and building permits, BOJ rate decision and Japan industrial production, South Korea industrial production, China manufacturing and non-manufacturing PMIs, Thailand trade balance and BoP current-account balance, Hong Kong GDP, Taiwan GDPFriday, Nov. 1: Australia PPI, New Zealand ANZ consumer confidence, Japan jobless rate and Jibun Bank manufacturing PMI, South Korea CPI and trade balance, China Caixin manufacturing PMI, Indonesia CPI, Thailand CPI and business sentiment

To contact the reporter on this story: David Finnerty in Singapore at dfinnerty4@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Nicholas Reynolds

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