One-week and one-month implied volatilities for dollar/yen options reached five-year lows last week when they fell to 7.4% and 7.5% respectively. One-week vols had been trading around 8.5% with the one-month at 8.1% the week before. During the fall in vol the dollar stayed in its JPY118-120 range against the yen. Traders said vol was pushed down by rumors of large exotic range plays expiring.
"There is a view that the Bank of Japan has an absolute stranglehold on dollar/yen," said Nick Parsons, global head of currency strategy at Commerzbank Securities in London. There is increasing evidence that the Bank of Japan is willing to commit substantial capital to maintain dollar/yen barriers, for example, at the JPY115-116 level. Thus there is little likelihood of the dollar depreciating below that level and this is pushing vol down.
Japan surprised the market with the strength of its second quarter economic data. Gross-domestic product growth for the second quarter was 0.6%, which is an annualized rate of 2.4%. This is the same as second quarter GDP growth in the U.S. The strength of this economic data has meant few traders want to sell yen. Thus dollar/yen is effectively capped at JPY115-116 and unlikely to rise significantly so the spot rate remains range bound and implied volatilities fall.
USD/JPY Spot & One-Month Implied Volatility
