Implied volatility on the U.S. dollar and yen jumped 55 basis points last week to 10.48%, following calls from Otmar Issing, chief economist at the European Central Bank, for Asian currencies to strengthen in order to ease the U.S. trade deficit. Issing's comments on Wednesday saw the yen strengthen against the dollar in the spot market to JPY102.385, up from JPY104.465 at the start of the week.
In spite of the strong yen, traders reported options volumes staying low and they were not expecting that to change. One trader at a German bank noted the dearth of data over the next two weeks would likely keep options volumes down. "Nobody has real belief in positions at the moment," noted one trader.
Traders reported demand from speculative accounts for dollar/yen options to cover the group-of-seven meeting on Feb. 4-5. A common strategy was to sell two-week at-the-money options prior to the meeting dates and buy at-the-money short-dated options that would cover the G7 week, according to traders. Some players were buying one- or two-month yen calls with strikes around JPY100, to take a punt on China revaluing its currency. Traders explained good liquidity in dollar/yen options mean it is a less risky way to speculate on Chinese revaluation than buying renminbi instruments.
Hans Redeker, currency strategist at BNP Paribas in London, said dollar yen option volatility is likely to remain high. "People have to assume there will be continued calls for Asian currency strength," he explained.
