The rise in U.S. interest rates to 1.25% from 1% last Wednesday was largely priced into the foreign exchange options market and volatility on dollar options dropped off following the Federal Reserve's decision. The vol drop was clear in the U.S. dollar/yen currency pair, which saw one year implied volatility fall to 9.5% Thursday, from around 10.1% on Monday. In the spot market, the dollar initially strengthened against the yen following the rate rise reaching JPY109.12 on Wednesday, up from JPY107.84 at the start of the week, but it fell back on Thursday to JPY108.1.
"The rate rise pushed vols lower as the risk has been taken out of the market," said one trader. Selling of long-dated at-the-money yen options has been constant over the last few weeks, he added, and this has driven volatility lower. The Japanese yen has been range-bound against the dollar at around JPY108 in the spot market, and the trader said market players were taking advantage of large inter-day moves by buying at-the-money straddles. Extremely short-dated at-the-money yen calls and dollar puts were also popular.
"The rate rise was well priced into the market and there were no real hawkish statements accompanying the rise," said Ian Stannard, currency strategist at BNP Paribas in London. "If anything, this has left the dollar a little bit exposed," he added. The yen, in contrast, is continuing to strengthen on the back of domestic recovery news, said Stannard.
