Bearish expectations for U.S. data-releases coupled with Japanese yen gains contributed to strong demand for short-dated downside USD/JPY puts last week. Market concerns ahead of Tuesday's Federal Reserve meeting also contributed to a pickup in USD/JPY implied volatility.
The cross traded at JPY114.77 Thursday, from JPY115.78 the week before, and traders said the most popular trades had maturities out to two weeks and strikes around JPY113 to JPY112. Downside options were popular across the curve, traders noted, but activity was driven mainly by speculation about U.S. payroll data Friday and the Fed meeting Tuesday. "There has been an increase in options associated with next week," said one trader Wednesday. "The market is focusing on the FOMC meeting and looking for a grind lower in spot." The market also was focusing on a possible revaluation of the Chinese Yuan--which traders said had spillover effects on other Asian currencies--and on rising Japanese interest rates and indications for a stronger yen.
Demand for downside options drove USD/JPY implied volatility slightly up from two-year lows the week before. The rise also contributed to greater interest in risk reversals as traders broadly expected implied vol to increase further. Three-month implied vol rose above 8.5% last week from just above 8% the week before. "It's not a massive move, but it's relatively large compared to other moves elsewhere," said Naomi Fink, fx strategist at BNP Paribas in New York. "[USD/JPY] vol tends to under perform," she said. "Now it's an out-performer."
