Implied volatility on the U.S. dollar and yen currency pair jumped last week after the dollar fell through options barriers. One-month implied volatility reached 9.3% last Thursday, compared to 7.9% two weeks before. The dollar depreciated against the yen to JPY107.45 last Thursday after pushing through a large options barrier at JPY108.40 the day before.
The destruction of several options barriers around the JPY108 strike means market players are generally short options and volatility, noted one trader. He reported a rush to purchase yen call options across the curve, with strikes between JPY105 and JPY107. Most players were entering vanilla trades simply to buy volatility, but traders said there was some demand for one-year yen calls with a no-touch barrier between JPY92 and JPY95. "Volatility could keep on rising," said a trader at a U.S. house. "If we break JPY107 we should see vols above 10%," he predicted.
Officials were speculating last week on whether the Bank of Japan would intervene to prevent its currency making further gains against the dollar. Tony Norfield, currency strategist at ABN AMRO in London, however, noted the spot market move is largely driven by the weakening dollar. Against the euro the yen has remained range-bound which supports the idea the yen is not strengthening, but rather the dollar is weakening. "We doubt there will be intervention," said Norfield, who noted this might change if there is evidence the yen is gaining against other currencies.