One-month euro/yen implied volatility rose last week to 8.50% on Wednesday from 7.6% Monday as the yen rose to JPY127 against the dollar and investors feared Japanese intervention. The dollar weakened against most currency pairs, but investors were most concerned about the yen, as the Japanese authorities have set a target ceiling of JPY130. Rob Hayward, a foreign exchange strategist at ABN AMRO in London, predicted the Bank of Japan would not intervene unless the yen strengthens to JPY120.
In addition, there has been a lot of volatility in the euro/dollar pair, one trader said, adding that when the euro strengthened against the dollar to above USD0.90-0.91 investors started to anticipate a trend reversal--and the value of the euro would start to fall. "There could be more excitement [in euro/yen]," one trader said, regarding the rise in implied vol.
Hayward said the rise in volatility will continue and predicted euro/yen spot would climb to JPY119 over the next few weeks and implied vol would rise to approximately 10%. This is because European authorities will probably support a rise in the level of the euro against the dollar as opposed to Japanese authorities who would like to prevent yen strengthening relative to the dollar. In addition, Hayward said, with the yen strong against the dollar, Japanese investors might look to buy cheaper overseas assets from Europe, adding to the strength of the euro.