Dollar/yen implied volatility fell in the run up to last weekend's Japanese election because traders were predicting the ruling party will remain in power. One-week implied vol dropped to 9.75% from 10.35% the previous week. The polls indicate that the Liberal Democratic Party is likely to win by a majority and the decrease in volatility reflects this, said Giovanni Pillitteri, v.p. in foreign exchange options trading at Deutsche Bank in London.
The dollar traded at JPY109.92 in the spot market last Thursday when DW went to press, up from JPY108.075 the week before, having spiked up to JPY111 during the week. David Bloom, currency strategist at HSBC in London, said strong U.S. economic data has caused the recent strengthening in the dollar against the yen.
Last week, before the general election, Deutsche Bank was recommending its clients buy six-month dollar puts with a knock-in at JPY113 to hedge against the yen weakening against the dollar in the short-term as a result of the LDP winning by a thin margin, said Pillitteri adding that, Prime Minister Koizumi's support would fall and he would find it even harder to reform the public sector. The likelihood of this is low, but so is the premium, he noted. Bloom said U.S. economic data is the most important factor for dollar/yen.
