Ahead of the Bank of Japan's statement Thursday on whether it would raise interest rates, the market was abuzz with options trading. "People were trying to get their hand on any type of overnight action," said one trader Wednesday. Investors were mostly focused on overnight straddles with strikes set at JPY121.50 on the upside and JPY120.50 on the downside. Spot was trading at JPY120 on Wednesday afternoon. Overnight implied volatility doubled to 14% Wednesday from 7% the day before and one-week implied vol jumped to 7.36% Wednesday from 6.85% Tuesday.
Trades were mostly weighted toward positioning for a weakening yen, but some contrarian players were also looking to scoop up U.S. dollar downside in the event that the BoJ did hike rates, despite the fact the options market was signaling rates would stay where they were the day before the announcement.
In the event, the BoJ left overnight rates at 0.25% and there are questions over its credibility, say traders. "If the Bank of Japan delays a rate increase because of political pressure, that will erode its credibility and traders might start to look to the government for direction on monetary policy," added one credit trader Wednesday.
While short-dated volatility remained jittery Thursday, strategists said longer-term investors are holding firm and are not positioning for a jump in yen strength that could be brought on by interest-rate rises. "Japanese corporate and fixed-income investors who usually buy out-of-the money yen calls have not been worried about a surge in yen strength," noted Greg Anderson, fx strategist at ABN AMRO in Chicago.
