Implied volatility on the U.S. dollar/Japanese yen fell last week as the currency pair remained range bound amid feather light trading volumes. One-month implied volatility last Wednesday stood at 8.7%, down from 9.6% the week before, noted a New York-based trader. In defiance of a general view that the yen would strengthen to around JPY105, spot remained at JPY110.7, down fractionally from JPY111.2 where it had changed hands seven days previously, he added.
Dollar/yen is typically the most volatile currency pair, however, in spite of brief fireworks following the release of much lower than anticipated U.S. employment growth figures on Aug. 6, there was little movement in the market, the trader said. The yen still looks as though it may strengthen, which would result in a corresponding increase in implied volatility. This is not likely to occur in the short-term, he predicted.
Options traders focused on buying short-dated dollar puts/yen calls as a protection against further indications that Saudi Arabia may increase oil output. An increase in oil production may result in oil prices falling, which in turn would take the pressure off the Japanese currency and push the yen lower, he explained.
Larry Brickman, currency strategist at Bank of America in New York, agreed that oil production will play a part in movement in the currency pair, but predicted that the dollar will strengthen against the yen. The Japanese economy may not be as strong as market sentiment indicates, he said. By year-end he anticipates the yen to have weakened to JPY112 against the greenback.
