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Vol Spikes On Announcement Of Japanese Banking Reform

The cost of U.S. dollar/Japanese yen options jumped last week following the announcement of the Japanese government's banking and economic reform package. One-month implied volatility rose to stand at 9.75% Wednesday, up half a percent on the week before. The week saw uncertainty over what sort of package the Japanese government would offer, said one trader. The currency pair traded at JPY123 last Wednesday, strengthening from JPY125 the week before.

Two weeks ago traders had been selling dollar calls with reverse knock outs at JPY126, but there was no particular play last week, noted the trader. Traders were buying gamma and vol in general, as well as entering into exotic structures. From a historical standpoint, vol is low, which will likely lead to some widening over the coming weeks or months, he added.

Anti-deflationary measures in the Japanese government's package were limited, with the promise of tax cuts also being inadequate, said David Mozina, head of foreign exchange strategy for the group of 10 currencies at Bank of America in New York. In the short-term the dollar will tend to drive the exchange rate, implying some dollar/yen downward bias. In the mid to longer run, the yen will likely weaken to between JPY128-130, with any turnaround being unlikely before the end of the first quarter, he said.

USD/JPY Spot & One-Month Implied Volatility

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