The cost of one-month dollar/yen options fluctuated last week before settling at 9.8% Wednesday, the same price as the previous week. Implied volatility had jumped to 10.2% Tuesday on the back of movements in the spot market, which saw the yen strengthen to JPY118.6 Wednesday, from JPY120.5 two days earlier, explained one New York-based foreign exchange options trader.
In spite of the immediate hike in volatility, concerns on the currency were quickly abated by market expectations that the Bank of Japan will intervene to prevent any excessive strengthening of the yen, said the trader. In January the Japanese central bank bought dollars against the yen and the market now takes some comfort in the belief that the central bank will intervene when required. Activity in the options market was muted with most trading activity in the spot market, said the trader.
Robert Lynch, foreign exchange strategist at BNP Paribas in New York, said repatriation flows into Japan has driven spot movement, with the yen strengthening against both the dollar and the euro in the past week. With most Japanese banks' suffering losses on their loan portfolios they have seen a greater need to raise capital, he explained. While the dollar may still weaken further against the yen it is not expected to be significant.
USD/JPY Spot & One-Month Risk Reversal
