Fears that last weekend's group-of-seven meeting would fuel a further weakening of the dollar against the yen caused volatility on the pair to jump last week. Short-term implied vol was especially affected, with one-week implied vol jumping to 13.8% on Thursday as DW went to press from 9.2% the Friday before. One-month implied volatility also rose, hitting 11% from 10% at the close of last week. Dollar/yen spot stuck at JPY105.5 for most of the week, making the rise in one-week implied volatility all the more striking.
A trader at a German bank said speculation that the G7 members would not reach a consensus on halting the dollar's decline over the last weekend prompted demand from market counterparties and brokers for downside at-the-money strikes for today and Tuesday. He added, "The G7 meeting in December saw dollar/yen move two figures and people are preparing for a similar move following this weekend's meeting."
Tony Norfield, head of foreign exchange strategy at ABN AMRO in London, noted interest from market players such as hedge funds looking for cheap ways to play downside in dollar yen. Popular tactics involved selling short-term puts struck at JPY105 or JPY104.50 and buying lower strike puts for a longer tenor. Norfield added recent comments from the Japanese finance minister suggested the overall trend of Japanese intervention on the downside seems to be staying in place.