Dollar/yen implied volatility fell last week after a flurry of trades from speculative accounts that were keeping vol high stopped. One-year implied vol fell to 8.5% and one-month dropped to an all-year low at 8.0% by last Wednesday. One-year implied volatility had jumped to 8.7% last Monday from 8.3% at the start of the previous week and one-month implied vol reached 8.56% last Monday from 8.2% at the start of the previous week.
The dollar weakened to JPY109.73 against the yen on the previous Friday, down from JPY111 the day before and this spot move encouraged market players to purchase options while volatility remained low. Traders reported hedge funds and prop desks snapping up at-the-money call options with dates ranging from one to three years. "The market got a bit nervous [when the dollar weakened], but now vol has collapsed again," said one trader. "People think it will drift around at these levels until the election," he added. In the last few months, the G7 meeting and payroll data have failed to trigger a vol rise and trading volumes on U.S. dollar currency pairs have been low.
Tony Norfield, currency strategist at ABN AMRO in London, noted the dollar's move higher and then lower against the yen could have been caused by several factors, including the recent jump in oil prices and corporate hedging activity. "There have been a lot of erratic moves in the market recently," he added.
