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Japanese Intervention Fuels Yen Put Buying

One-month Japanese yen/U.S. dollar implied volatility fell to 10.6% Thursday down from 12.5% a week earlier as demand for yen puts/dollar calls increased on news that the Bank of Japan had intervened to boost its economy. Banks' proprietary desks and hedge funds were the most active, buying one-week yen puts/dollar calls as the one-month 25-delta risk reversal moved further in favor of dollar calls. The options typically had strikes around JPY125.25 when spot was trading around JPY119.

The Japanese yen fell last week on news that the government had intervened through various banks and began selling yen. "A lot of people were starting to believe we were headed for some kind of dollar/yen collapse before the Japanese government stepped in and things began to rally," one trader said. The spark in yen puts continued through much of the week before leveling off Thursday afternoon. Despite the rally, however, traders said overall volumes in the foreign exchange market were considerably lower as investors continued to remain uncertain about the global economy in the wake of the terrorist attacks in the U.S. "Investors are playing risk close to the vest," said another trader.

Andrew Chaveriat, foreign exchange technician at BNP Paribas in New York, predicted over the next month the rally prompted by the Japanese intervention would begin to run out of steam. However, the current rally likely will maintain a steady pace into November. He predicts spot will be trading JPY127.35-130 before the rally comes to a close.

USD/JPY Spot & One-Month Implied Volatility

Source: J.P. Morgan Chase

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