Implied Vol Jumps As Yen Rallies
The cost of U.S. dollar/Japanese yen options rose a full percentage point last week as the dollar fell to JPY116.50 on Wednesday, its lowest level in more than a month versus the yen. Implied vol and the dollar tend to move inversely, as the long-term trend has been dollar strength and a move away from that implies broader uncertainty, traders said. One-month implied vol rose to 11.5% on Wednesday in New York, up from 10.5% on Monday, mirroring the greenback's fall from JPY119.50 earlier in the week, according to fx options traders.
And investors bet the downward trend will continue, as 25-delta risk reversals flipped from 0.4 vol to 1.4 vol in favor of yen calls/dollar puts. "People are buying downside strikes to protect themselves as dollar/yen moves lower," said one trader in New York. A common trade was for investors to buy dollar puts maturing in one or three months with strikes below JPY115, with those at JPY113 being most common.
The sharp move lower in spot can be partially attributed to seasonal factors, according to David Mozina, global fx strategist at Banc of America Securities in New York. The U.S. government was set to pay USD25 billion in Treasury coupons last Thursday, and with foreign investors holding 35% of Treasuries--of which Japanese investors are the largest group--that could benefit the yen. "When payment is made, some will be reinvested, but some will also be repatriated," he said, adding the move lower in spot was likely due to banks front running this phenomenon. The weaker dollar can also be attributed to the failure of the Federal Reserve to cut rates last week, "which has made people averse to holding U.S. dollar assets," Mozina said. He expects the dollar to move lower and has a 12-month forecast for spot to fall to JPY113.
USD/JPY Spot & One-Month Implied Volatility