One-month implied volatility for Japanese yen/dollar options rose only slightly to 10.5% Wednesday, up from about 9.8% a week earlier, as demand for at-the-money yen calls/dollar puts, saw a slight increase. The one-month 25-delta risk reversal inched further in favor of yen calls/dollar puts. Traders reported that activity in the options markets was slow last week because investors were wary of the volatile spot market. "Spot has been whipping around all week. It's very choppy. Most investors are staying out," said one trader. Spot was trading at JPY133.65 last Wednesday.
Japanese government officials' insistence that they intend to gradually weaken the yen has already been priced into the market, the trader continued. "Everything is old news now. There is really little reaction to anything in the market," another trader added. Traders reported that some investors were buying out-of-the money yen calls with strikes of JPY133. Hedge funds and investment firms were most active in the market.
Paul Podolsky, a foreign exchange strategist at FleetBoston Financial, said Japan's continued assertion that it wants to have a weak yen but not a sharp decline has prevented the dollar to surging to JPY140 in the spot market. Instead, the yen will gradually weaken. Traders predicted even slower activity in the market next week with the start of the Chinese New Year. "Things are really going to slow down," one trader noted.
USD/JPY Spot & One-Month Implied Volatility
Source: J.P. Morgan
