The Bank of Japan intervened to prevent the dollar/yen breaking through the JPY116 barrier last week, causing one-month implied volatility to fall back to 7.75% from 8.8% a week ago. The Bank of Japan intervened twice in the spot market last week when the dollar/yen currency pair touched the JPY116 lows. Traders estimated it spent USD4 billion protecting the barrier. Vol dropped because traders could see that the Bank of Japan was not prepared to let the yen appreciate further.
Paul Mackel, senior currency strategist at ABN AMRO in London, said that the perception that Bank of Japan will continue to intervene is likely to push one-month implied volatilities lower still and will keep dollar/yen spot rates trading between JPY116-118 in the short term. Japanese equities have increased by 40% since April, resulting in a large capital flow into Japan. This continuing interest in Japanese assets will keep pushing the JPY116 barrier as yen tries to strengthen against the dollar. In the short term, Mackel believes that the Bank of Japan will attempt to maintain this barrier.
One-year risk reversals are 1.4 vols in favor of 25-delta yen calls/dollar puts versus yen puts/dollar calls. Mackel said he expects the market to reduce its preference for yen calls.
USD/JPY Spot & One-Month Implied Volatility