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Derivatives

Dollar/Yen Vol Drops Sharply

One-month implied volatility for U.S. dollar/yen options fell more than 1.5 percentage points, as the spot market settled down on the back of more reassurances from Japanese government officials that they want to gradually weaken the yen but are not in favor of a rapid decline. One-month implied vol fell to 9.5% by Thursday, down from higher than 11% the previous week. Traders reported there were no massive deals throughout the week, although some long-term punters did take profits on the yen's slide. A common trade was for proprietary desks to take profits on one-year dollar calls struck at JPY140, as spot moved nearer the strike, and buy one-year dollar puts struck at JPY120. Spot was at JPY132.10 Thursday. "The real theme has been volatilities have come off quite smartly since last week," said one trader in London. The market in general became less bearish on the yen, with the one-month 25-delta risk reversals still in favor of dollar calls at 0.3 vol, compared to one vol the previous week.

Rob Hayward, a foreign exchange strategist at ABN AMRO in London, said Japanese government officials have reiterated that they want to have a weak yen but have backed away from making statements that led to sharp declines in the yen. "The feeling that dollar/yen could shoot up to JPY140 has dissipated, which is consistent with lower vol and risk reversal[s]," he said. Hayward added a gradual weakening seems more likely than it did a couple weeks ago. "They may be happy to see it go to JPY140, but they don't want a dramatic move and to have people pulling money out of the stock and bond markets," he added.

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