Dollar/yen implied volatility shot up last week as traders bought options to cover their short vega positions. Implied volatility rose in the short-dated one week contracts to 12.54% Thursday from 12.26% the previous week, while one-year vol jumped to 9.58% from 9.32% the week before, according to traders.
London-based traders said the rise in implied volatility was sparked by foreign exchange professionals purchasing options to cover short volatility positions executed around three months ago when traders were predicting the dollar would depreciate further. One fx professional said traders were buying dollar puts with JPY98 strikes in February, when analysts were forecasting the dollar could sink as low as JPY90. The recent strengthening of the dollar against the yen means these positions are now deep underwater and traders are trying to stem the losses, he added. The most popular trades last week were at-the-money forward straddles. There were also some low delta options being traded, for example, one USD300 million yen put with a strike at JPY140 and a premium of around 125 basis points traded on Friday when spot was at JPY114.60 and volatility was 11.35%.
Ian Stannard, senior currency strategist at BNP Paribas in London, said a lot of the movement in spot has been driven by the yen. The sharp rise in the price of oil has had a negative effect because Japan has to import most of its energy and this could dent the fragile recovery. In addition, the fall in the Nikkei has seen most of this year's growth wiped out and this could deter further foreign investment. On the positive side for the yen, Stannard pointed out that concerns about the Chinese authorities' plan to cool parts of its economy impacting Japan appear to have been overstated.
USD/JPY Spot & One-Month Implied Volatility
Source: JPMorgan