One-month U.S. dollar/Japanese yen implied volatility skyrocketed more than 200 basis points Thursday as the yen surged to its highest level since late last year and had its biggest one-day gain against the dollar in more than seven months. Implied vol rose from 8.8% Wednesday to nearly 11% Thursday; spot was JPY128.6 Thursday, compared to JPY130.6 the day before. "It's two vols more, it's beautiful," gushed one options trader at a European bank in London. Spot had been rangebound for the previous month.
The move in spot caused some punters to come into the market and take short-term positions, according to traders. One said he had witnessed demand for one-week yen calls/dollar puts struck at JPY128 and JPY129. That helped flip one-month 25-delta risk reversals firmly in favor of dollar puts/yen calls to 1.2 vol; it was 0.3 vol in favor of dollar calls at the start of the week. Still, "most people think the dollar will go back, at the moment the market is still short yen," one trader said, noting the Bank of Japan has made it clear it favors a weak yen.
Rob Hayward, a foreign exchange strategist at ABN AMRO in London, said the rise in spot was fueled by demand for Japanese equities. The stocks have also been particularly in favor since earlier last week when Merrill Lynch recommended investors up their exposure to the Nikkei 225. But looking ahead, Hayward said the BoJ will probably intervene to force the yen weaker, as has been its policy. "We've had such a huge move, we are due for a correction. They will not be happy to see the yen strengthen."
