Hawkish talk from the Bank of Japan last week regarding an end to its zero interest-rate policy sent speculative accounts rushing to buy U.S. dollar puts and yen calls. The statement also breathed fresh life into implied volatilities, which had been grinding lower after last month's tumultuous profit taking rocked vols across currency pairs. Three-month USD/JPY implied volatility bobbed up to 8.57% Tuesday after the news, compared to a two-month low of 8.48 reached Monday. Other currencies' implied volatilities, however, continued lower, with one-year euro/dollar implied volatility at 8.9% last Thursday, close to its year-long low of 8.5%.
In spot, the dollar gained on the yen at the start of the week, pushing the Japanese currency to a low of JPY115.85, a level not seen since April. BoJ governor Toshihiko Fukui's comments a rate rise would come "soon" saw the yen gain Tuesday, reaching JPY114.965 Wednesday. As DW went to press Thursday, however, the dollar had recovered somewhat to JPY115.65.
The greenback's slight reversal was not enough to dissuade yen bulls, however, with traders noting buying of three-month to six-month USD/JPY puts with strikes at JPY105. Some were structured with knockouts at JPY120 to lower the option premium, but there was no interest in more exotic instruments, reported market makers. "Vanilla directional plays are the flavor of the week," explained a trader at a European house in New York. Short-dated options were also out of favor, with customers already talking about the summer slump, he added.
Tony Norfield, fx strategist at ABN AMRO in London, said there is a high likelihood the BoJ will raise rates 25 basis points when it meets July 14.
