The U.S. dollar plunge in the spot market Wednesday morning--to a low of JPY116.72 from JPY120.12 late Tuesday--fired up option buying across the curve. Traders said this was the quickest fall they'd seen on any currency cross in over two years. "That's enormous," one trader said. "I can't remember the last time anything traded 3% in one day."
Demand was seen for vanilla options, such as one-month dollar puts and yen calls with at-the-money strikes. "On a day like today, when you're seeing panic buying, people will take the easiest thing they can get," one dealer said in the teeth of the meltdown Wednesday. One-month implied volatility on the pair rose from 8.2% Tuesday to 8.9% Wednesday.
Market officials were at a loss to explain factors driving the greenback's collapse. "There's a difference between what triggered it and what carried it through," noted Steven Englander, chief currency strategist for the Americas at Barclays Capital in New York. The U.S. Federal Reserve's 13th consecutive interest-rate hike triggered global selling of the dollar against all major currencies Tuesday, he said. But the dollar did not weaken as much against other currencies as against the yen Wednesday.
This was mainly due to the fact dollar/yen has been heavily traded this year and has been a profitable currency pair for many trading accounts. "It hasn't been a great year and people can't afford to lose profits," Englander said. "The sell-off against the yen is about risk reduction and position liquidation, rather than a fundamental change in point of view."
