Demand was keen for yen calls/U.S. dollar puts last week after the greenback recovered from eight-month lows of JPY110.11, reaching JPY110.38. The appreciation came after the U.S. Treasury declined to formally cite China for currency manipulation and despite a 25 basis-point U.S. rate rise, which sent dollar/yen volatility see-sawing.
Market officials said one-month implied vol popped up to above 11.4% in the lead up to the rate hike, from below 10% the week before. It quickly retracted and on Thursday as DW went to press was sitting around 10.5%. "These are really heavy swings," said one European trader. He also noted some options books were caught short volatility and predicted a market squeeze as speculative accounts rushed to buy back vol.
Traders said yen calls with maturities from one week out to three months were being snapped up, but the fluctuating volatility caused people to buy the options according to delta calculation, rather than definite strikes. "People are reluctant to get into something specific in a market that is so choppy," said one trader, who noted buying of short-dated options at 25 deltas was standard.
Adam Baines, currency strategist at Citigroup in London, said dollar/yen is expected to be driven lower on the back of the Federal Reserve signaling it will pause its two-year long rate-rise policy. "This will take the wind out of the sails," he said.
