A rise in U.S. dollar/yen implied volatility saw options players start buying short-dated greenback calls last week in anticipation of a dollar strengthening. Euro/dollar is traditionally the most attractive currency pair for taking dollar positions because it is more volatile than the dollar/yen, but the end of the Japanese fiscal year saw yen implied volatility jump as Japanese investors rebalanced portfolios and triggered a yen selloff.
The spot move to JPY107.4 last Wednesday, from JPY106.34 at the start of the week, saw one-week implied volatility jump to 10.5% last Thursday compared to 7.9% on Monday. Choppy spot moves ahead of Friday's non-farm payroll data in the U.S. were also driving short-term implied volatility, said traders. Overnight and one-week dollar calls, with strikes between JPY107-JPY109 were popular, they reported. Most traders were buying dollar calls, but some took this as a good chance to buy cheap at-the-money yen calls, he explained.
Ian Stannard, currency strategist at BNP Paribas in London, said inflation figures released on Thursday as DW went to press and the payroll data on Friday would be key in deciding the direction of the dollar against the yen. The market expectation is for moderately positive data, which Stannard said may lead to renewed downward pressure on the dollar. Strong data, however, would give the dollar a boost because it would likely trigger the unwinding of carry trades, he noted.
