One month U.S. dollar/Japanese yen implied volatility dropped almost 2% last week to 9.1%, near a two-year low, as traders scooped up dollars on the view that strikes on Afghanistan have gone smoothly so far. Implied vol had hovered between 10.5-10.8% earlier in the week. Traders said the drop in vol was partly caused by a quiet spot market. "All the vol looks pretty cheap right now, especially considering the political turmoil we're in," said one trader. Spot was trading at JPY120.14 Thursday.
Traders reported seeing dollar calls/yen puts at the short end, particularly with three-month maturities. Strikes ranged from JPY121-123. One trader quipped, "Given that there's anthrax left, right and center and bombs exploding every night, it has been pretty stable."
Hans Redeker, head of foreign exchange strategy at BNP Paribas in London, said the terrorist attacks last month will hasten the global slowdown spooking foreign investors who had piled into Japanese assets on the hope of a recovery-aided round of reforms. "If the reform process is going to be slower because of weaker growth, then [investors] have to question why they are in Japanese assets,"he said. Strength is returning to the dollar based on confidence in U.S. policymakers on a relative basis, especially given the European Central Bank's failure to cut interest-rates last week. "It looks like these guys are in the driver's seat and we are the passengers," he said, referring to the U.S. Redeker expects the dollar to be at JPY121 in the next month and JPY126 in three months.
USD/JPY Spot & One-Month Implied Volatility
