Short-dated U.S. dollar/yen options with at-the-money strikes were being snapped up last week. The market was loading up on near-historical low volatility which is the result of the pair being range bound since the start of the year, according to traders. However, one-month implied volatility has started creeping up, reaching 8.8% last Thursday, up from 8.69% the previous Friday--and it's expected to pop as the Bank of Japan makes more comments on its plan to abandon its zero-interest-rate policy. On Thursday spot was trading at JPY116.2, with the dollar having depreciated from around JPY118 the same time last week.
"A lot of people are buying gamma at the front end of the curve because it's cheap and this is the most gamma you can get," said one trader. Another said front-dated, at-the-money options present an opportunity to pick up profit when both one-month and one-year implied volatility move above the 8% mark. "No one wants to get caught out of this," he added.
A credit official at a European firm said activity was led by proprietary desks, but there was interest from every corner of the market. Going forward, he said everyone is looking like selling at the front end of the curve and buying the back end. This official also noted some of the same players had shown interest in the downside of euro/yen, buying euro puts with strikes around and above JPY140. On Thursday the euro was at JPY139.98.
Currency strategists at Barclays Capital said in a report they expect the yen to rise above JPY118 against the dollar in the short term, on the back of buy the rumor/sell the fact activity. In the medium term however they predict the yen to depreciate against the greenback.
