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Derivatives

Dollar/Yen Vol Spikes As Greenback Rallies

Implied volatility on the dollar/yen currency pair jumped last week as the greenback appreciated against the Japanese currency in the spot market.

Implied volatility on the dollar/yen currency pair jumped last week as the greenback appreciated against the Japanese currency in the spot market. One-month implied volatility traded at 11.25% Wednesday, up from 10.25% the previous week, according to a New York-based trader. Dollar/yen traded at JPY109 last Wednesday compared with JPY105 seven days before, he added.

Option trading in the currency pair was light versus the spot market. The dollar was helped by clients in Japan buying foreign securities, this meant most of the activity in the currency pair was driven by natural buyers, rather than the Bank of Japan, noted the trader.

Short-term dollar bullishness is expected to continue the dollar's run against the yen, prompting some purchasing of yen puts/dollar calls. Doubts about the depth of the U.S. recovery, however, may halt gains made against the yen in the medium term, he said, noting that weak employment numbers next month could turn the whole market around again. Robert Lynch, foreign exchange strategist at BNP Paribas in New York, agreed that while improved U.S. data has encouraged the recent dollar strengthening, the move is unlikely to be sustained in the medium-term. Lynch predicted the yen will gain back ground to JPY102 by the end of the second quarter.

USD/JPY Spot & One-Month Implied Volatility

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Source: JPMorgan

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