A wholesale rush to buy options giving U.S. dollar downside protection against the yen pushed implied volatility higher last week as the greenback tumbled through the key JPY105 level. The resurgent Japanese currency rose to JPY103.45 during trading on Wednesday, marking a four-year low for the dollar and causing one-month implied volatility to jump to 13.6%, up from 11.9% on Tuesday. Traders reported strong demand for dollar puts and yen calls across the curve.
"The market got spooked when spot went lower," said a trader at a German bank. "On Wednesday there was a clamor for optionality by everybody," he added. One-week to one-year generic straddles were heavily bid, according to traders. Funds, market makers and banks were all active players. Despite the yen's sharp appreciation, traders expected the market to settle coming into the long Easter holiday weekend. "The market was hurt on Wednesday," said one trader. "I expect a period of consolidation over the next week," he added. As DW went to press on Thursday, one-month dollar/yen implied volatility had cooled to 11.8%, and one-year implied volatility was at 9.65%, down from 10% on Wednesday.
Hans Redeker, currency strategist at BNP Paribas in London, said the bank forecasts dollar/yen to reach JPY90 by the end of the year. Data from the Japanese ministry of finance shows intervention in the foreign currency market totaled JPY15.2 trillion in the first quarter of this year, he noted. This is 75% of the amount spent on intervention last year, said Redeker. "The market is questioning how long the Japanese finance ministry can continue this level of intervention [in support of the dollar]," he added.