One-month implied volatility on dollar/yen leapt to 10.8% last Wednesday, up from 10.1% the previous week as the greenback continued its gradual slide against the yen in the spot market. The dollar traded at JPY108 in the spot market Wednesday down from JPY109.6 the week before, said a New York-based trader. With outstanding trades on the currency pair being heavily favoring yen calls/dollar puts, any small move in spot keeps implied volatility on the currency pair high, he explained. One-month 25-delta risk reversals stood at 1.8% in favor of yen calls last week, compared with 1.3% the week before.
With the market heading into a relatively quiet trading period this month, dollar/yen spot may remain around the JPY107 mark for the coming few weeks, the trader predicted. In spite of this the dollar is expected to continue its southward journey and may hit new lows by Christmas, he added.
John Rothfield, senior currency strategist at Bank of America in San Francisco, predicted that until year-end the yen will be range bound between JPY107 and JPY110 before picking up steam in the new year and weakening to JPY115. While the Bank of Japan continued to intervene in the currency last month, this intervention has not reached the record levels of September and the need for active central bank intervention to weaken the yen is tapering off. The Japanese economy is beginning to weaken and this combined with stronger economic indicators coming out of the U.S. bodes well for dollar strengthening, he said.
USD/JPY Spot One-Month Implied Volatility