A report Tuesday from Japanese financial information services firm Nihon Keizai Shimbun that the Bank of Japan was planning to regulate yen carry trades caused a brief spike in yen implied volatility levels. Banks and hedge funds bought short-dated options in yen carry pairs, prompting one-week euro/yen implied volatility to reach 5.75% Wednesday morning from 5.3% Friday, and one-month implied vol jumped to 6.25% from 6.1%.
It was a welcome but short-lived reversal in vol levels, which have plummeted across the board since August. One-week and one-month EUR/JPY implied vols both had been about 7% last month.
"[The NKS report] put vol into yen pairs," said one fx options trader. "All carry players went in the opposite direction and short-term volatility entered the market, but the underlying theme is still there. Vols are heavy."
Traders said the timing of the report--after the close of New York trading Tuesday--along with BOJ denials and a lack of any follow-through in spot caused euro/yen implied vol quickly to return to its previous levels. EUR/JPY spot was unchanged at JPY149 Wednesday. It has traded within a range of JPY148 to JPY150 since August. "[The news] happened in the most illiquid part of the day," said one New York trader. "You saw some panic pay-ups, but that literally lasted for about five minutes and then vols collapsed back to where they were before the news," said another.
Andrew Chevariat, fx strategist at BNP Paribas in New York, and some options traders attributed the volatility sell-off to issuance of structured notes. But others pointed to uncertainty before U.S. elections. One New York trader said, "The [U.S.] dollar will get its cue from the elections and that will energize other currencies."
