The price of U.S. dollar/yen options spiked last week as traders snapped up short-dated options after the greenback rallied to JPY118.30 in the spot market. Proprietary trading desks and hedge funds bought one-week and two-week dollar puts/yen calls Tuesday at strikes of JPY118 and JPY117.50, respectively. The trades caused one-month implied volatility to rise to 11.75% from 10.5% on Tuesday. By Thursday, however, volatility had dropped back down to 10.5%. Traders said a total of USD1 billion of dollar puts were executed.
Nick Parsons, global head of foreign exchange research at Commerzbank Securities in London, said the fx market is still anticipating an intervention in the near term from Zembei Mizoguchi, the new vice minister of finance. Parsons said in the past week there have been two dollar rallies because of this, but spot has not broken through JPY118.30. Parsons noted four out of five of the last vice ministers have intervened in the level of the yen within a month of appointment.
Parsons thinks the Bank of Japan will intervene and that it would target levels of JPY120-125. He added, however, that the intervention might be carried out via euro/yen as the euro is stronger than the dollar and it would be easier to depress the yen against a strong currency. With this currency pair, the bank would likely target levels of JPY130.
USD/JPY Spot & One-Month Implied Volatility
