Dollar/yen implied volatility shot up last week to 10.8% Wednesday from 9.45% Monday as investors bought a slew of one-to-three month dollar puts/yen calls as the yen strengthened against the greenback. Traders said a variety of investors, from hedge funds to banks, bought dollar puts/yen calls at strikes from JPY115 to JPY111 at spot levels of approximately JPY116-116.50. Dollar/yen spot was trading at JPY117.21 Monday and reached JPY115.94 Thursday.
"It was a dramatic move in spot and the vols are pricing it in," said Aziz McMahon, senior foreign exchange strategist at ABN AMRO in London. He explained that the dollar has fallen against the yen to historic lows and if it breaks below last year's low of JPY115.50, it is likely to continue to fall to JPY110 within a month. McMahon attributed most of the spot movement to comments from U.S. Treasury officials that it is happy with the dollar depreciating. "The idea is that the weaker dollar is helping U.S. exports and will aid the U.S. recovery," he explained.
The Bank of Japan has been intervening at these levels to try to keep the yen from appreciating too strongly against the dollar, McMahon pointed out. But these interventions are not guaranteed to keep the dollar from depreciating further as the U.S. is criticizing the BoJ for trying to weaken the yen, he added.
