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Derivatives

Dollar/Yen Short-Dated Implied Vol Jumps

Overnight and one-week implied volatility on dollar/yen options jumped last week after market players rushed to purchase protection for a possible spot move triggered by this weekend Group-of-Seven meeting and a data release by the Bank of Japan.

Overnight and one-week implied volatility on dollar/yen options jumped last week after market players rushed to purchase protection for a possible spot move triggered by this weekend Group-of-Seven meeting and a data release by the Bank of Japan. Overnight implied volatility on the options pair was around 14% with spot at JPY110.8 last Thursday. One-week implied volatility reached 10.2% last Thursday, compared to a low of 7.2% the week before.

Traders said there was demand for overnight and one-week yen calls, with strikes around JPY109.50 and JPY110. Market players were interested in these trades as insurance in case the Bank of Japan's Tankan survey measure of business confidence, released on Friday after DW went to print, triggered the dollar to strengthen against the yen. The G7 meeting scheduled for this weekend also created interest in at-the-money options, but traders said few players were expressing any view on the direction of the currency pair. Interest in long-dated trades remained low, however, according to traders because they expect the currency pair to remain in the JPY108-110 range. One-month implied volatility was at 8.7% last week.

Trevor Dinmore, currency strategist at Deutsche Bank in London, noted dollar/yen one-week implied volatility was still low compared to the G7 meeting last year, when it reached 17% on the Friday before the meeting. The Tankan survey is also not expected to move dollar yen outside of its range, according to traders. "When you have had positive numbers on the Tankan, you have had around equal chances of dollar/yen rallying or strengthening," explained Dinmore.

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