One-month implied volatility for dollar/yen options dropped last week after the Bank of Japan allayed investor uncertainty and bought approximately USD2 billion in line with its policy of maintaining a weak yen, according to foreign exchange options traders. "There seems to be a sense that the downside is protected and the [BOJ] is there," said one trader. One-month implied vol, which had been 9.2% at the start of the week, dropped to 8.7% Wednesday after the BOJ intervened through Japanese banks in the U.S. market, easing some uncertainty among fx players. On a side note, traders said it was unusual for the BoJ to buy dollars in the U.S.--it usually intervenes through European or Asian markets--and probably only did so because London was closed for a national vacation.
And despite a relatively quiet week due to the holiday in the U.K., traders said a common trade was for investors to buy one-week dollar calls/yen puts struck at JPY125-126, on the view the central bank's purchases would lead to a stronger dollar. "People were expecting the BOJ to butcher the market and really bring it higher," said one trader, although he noted that was partially offset. "It's a dollar environment right now and the U.S. equity markets are pointing to a weaker dollar." Spot was JPY124.50 late Wednesday in New York.
Bob Gay, head of fixed-income research at Commerzbank Securities in New York, said the dollar remains fundamentally overvalued and is being helped by the BoJ's interventionist policies. Still, he said he expects the dollar to stay in a range of JPY120-125 for the short-term. "Anything below JPY120 is a line in the sand and [the BOJ] doesn't want it, so they will do what they have to do to make sure the yen doesn't strengthen," he said.
USD/JPY Spot & One-Month Implied Volatility
Source: JPMorgan
