One-month dollar/yen implied volatility shot up to 12.94% last Wednesday after settling down to 10.83% going into the weekend. The week before implied volatility had rocketed to 12.46% from around 10% after a statement from the Group-of-Seven most industrialized countries about exchange rate flexibility (DW, 9/29).
Much of the volatility came as a result of intervention in the dollar/yen spot market by the Federal Reserve Bank, which was rumored to be acting on behalf of the Bank of Japan. On Wednesday the currencies were changing hands at multi-year lows of JPY110.06, even though central bank intervention had succeeded in pulling the yen up from JPY111.15 to JPY111.78 the previous day.
Violent movement in the spot market drove market participants to hedge exposure to further extreme moves, said the trader. Players bought low delta yen calls/dollar puts. One-year butterfly spreads were also popular, in which participants purchased 10-delta strangles and sold at the money forward straddles, he added. The next large set of option strikes sit between JPY108.50 and JPY110. If spot moves through these levels volatility will explode, he predicted.
Robert Lynch, foreign exchange strategist at BNP Paribas in New York, noted much of the dollar weakening is positioning ahead of the impending U.S. employment report, which is not expected to bring good news. The U.S. economy, however, is expected to recover and the dollar will likely appreciate, he said. BNP forecasts the dollar to strengthen to JPY114 by the end of the year.
USD/JPY Spot & One-Month Implied Volatility
