Foreign exchange traders snapped up large volumes of euro puts/yen calls on Wednesday to hedge against a further slide in the single currency. The buying came after the yen jumped to JPY135.50 from JPY138 against the euro on Tuesday. The move in spot pushed one-month implied volatility to 10.8% last Wednesday, up from 10.2% at the start of the week.
The market is always nervous about euro/yen, said a trader at a German bank, adding that spot moves in the currency pair always lead to higher implied vol. Market participants were buying one- to three-month euro puts struck at JPY132 to JPY134 to protect the downside. Risk reversals were also a common trade. The preference for euro puts pushed the risk reversal to 0.65 vol on Wednesday from 0.35 on Monday. The majority of trades came from inter-bank counterparties, noted traders.
The Bank of Japan caused the move in spot, when it stopped purchasing dollars at JPY111.10 on Tuesday. Tony Norfield, currency strategist at ABN AMRO in London, explained this forced the yen higher against other currencies, but within half an hour it had fallen back again. This had the effect of knocking out a lot of structures hedging further yen rises in a short period of time. "These erratic moves in strength of the yen will effectively reduce the number of short-term players in the market." He added, "Intervention by the Bank of Japan had a damaging impact on the options market."
EUR/JPY Spot & One Month Volatility
