Short-dated implied volatility on the U.S. dollar/yen popped last week, reflecting strong option-buying interest. Traders reported a grab for one-week options covering Friday's expected 25 basis-point Japanese interest rate rise. Overnight at-the-money options were also in high demand Thursday.
In the spot market, the dollar gained on the yen, on speculation the Bank of Japan may take a more doveish stance on future rate rises than previously predicted. The greenback was at JPY115.421 Thursday, after starting the week at JPY114. As the dollar gained, implied volatility also ticked up, reaching 9.75% Thursday compared with 9% the previous week. "People just want to be long," said one trader, noting even rising implied volatility did not put hedge fund and other accounts off buying at-the-money puts and calls. Although most players were looking to capture volatility, plain-vanilla puts and calls were more popular than exotics because they're cheaper for short-dated trading, explained the trader.
"The Japan story is huge," said another dealer, noting interest in European currency pairs more or less dried up last week as all eyes turned to the BoJ. Nick Bennenbroek, fx strategist at Brown Brothers Harriman in New York, noted volatility on the pair could last well into this week, with Federal Reserve Chairman Ben Bernanke making his semi-annual testimony to both houses of congress Wednesday, and U.S. consumer price index data due the same day, likely sparking more trading.
