Dollar/yen implied volatility fell across the curve last week as a result of the upcoming Golden Week holiday in Japan and positive macroeconomic data coming out of Tokyo. Traders said one-year implied vol dropped to 9.25% on Wednesday from around 10% the week before, while three-month implied vol fell to 8.5% from 9.25%. One-week vol was 7% at the end of the day Wednesday, from 8% the previous Friday. Fund managers were unwinding long call positions, according to one trader, typically selling dollar calls with strikes ranging from JPY135-140. Spot was trading at JPY129.65 on Wednesday.
Traders said anticipation of the holiday week in Japan kept volatility low in the short-end of the curve because investors want to avoid holding holding options when the spot market likely will be inert.
Steven Englander, global currency economist at Citibank, said there are signs of improvement in the Japanese economy as indicators show it is recovering at a better-than-expected rate and there is a tendency for investors who were short yen to begin to cover their positions. He added, however, that he does not think the yen will appreciate considerably as the Japanese authorities are signaling to the market that they do not want to see it strengthen above JPY130.
