One-month yen/U.S. dollar implied volatility fell to 10.6% last Wednesday from 11% a week earlier as demand for yen puts/dollar calls declined in line with a growing uncertainty over Japan's finance ministry's strategy on the strength of the yen. The week began with traders believing that the yen would continue its downward course until the middle of the day Wednesday, when Yasuo Fukuda, Japan's chief cabinet secretary's comments reversed the market. Fukuda said that although the current exchange rate is acceptable, its continued fall over the last three months has happened too rapidly. Traders in New York interpreted the comment to mean that Japan may not want the yen to decline much further without a respite.
The uncertainty has caused implied volatility to fluctuate since last Monday, when it spiked up to 11.7% before settling to 10.5% Wednesday. Proprietary desks were the most active, but traders reported seeing activity by equity money managers and hedge funds as well. They were buying up one-to-three month yen puts/dollar calls as the one-month 25-delta risk reversal moved further in favor of dollar calls. Spot was trading at JPY132.30 Wednesday.
Paul Podolosky, a currency strategist at FleetBoston Financial, predicted continued spikes in implied volatility over the next months, as Japan's finance ministers look to further weaken the yen in the long term.
USD/JPY Spot & One-Month Implied Volatility
Source: J.P. Morgan
