One-week to one-month U.S. dollar/yen implied volatility rose sharply Tuesday afternoon on the expectation that the Bank of Japan would intervene in the yen--which happened Wednesday morning at a price of JPY123.70. One-week implied vol rose to 11% from 9% Tuesday and one-month implied vol climbed to 9.75% from 7.95% the week before. One-year implied vol did not move as much over the week, rising to 9.23% from 9.08% because investors were buying options based on expectations of short-term spot moves.
Proprietary desks bought dollar calls at strikes of JPY125-126 as spot reached JPY123.70, traders said. Volume was three times more than normal, with USD1 billion in trades going through, split equally between one- and two-week options. "All these guys made a lot of money--they got the direction right," one trader said.
By Wednesday, spot had depreciated to JPY124.15. Ian Stannard, a foreign exchange analyst at BNP Paribas, said Japanese officials are more concerned with the pace of the dollar/yen appreciation than the spot level. He expects spot will move into the JPY126 area and then to JPY120-122 as portfolio flows into Japanese assets remains particularly strong. Stannard said the Japanese central bank would attempt to stabilize the dollar/yen level, but will not try to force the yen to depreciate significantly.
