Traders looking to profit from the sharp volatility in USDJPY may wake up sharply as the yen could be caught between rising odds of intervention and US interest rate bets.
Strategists said the one-month implied volatility of USDJPY could fall to its lowest level since March 2022. Driving this is the narrowing of the pair's daily trading range, which is due to resistance from both sides limiting the movement.
USDJPY seems to be in a dilemma, with the Ministry of Finance's threatening to intervene on the one hand, and the Bank of Japan reducing the likelihood of a rate hike on the other, which provides support for the downward exchange rate. "This was stated by David Forrester, senior foreign exchange strategist at Credit Agricole CIB.
The pair's one-month implied volatility rose as high as 814%。This kind of ** may end up being short-lived.
Forrester said that the Fed lowered its interest rate forecasts after strong US inflation data, which also limited the downside for USDJPY. The maximum daily volatility of USDJPY last week was just 075 yen, compared to more than 2 yen at the beginning of January. On Monday, in Asia, the yen was trading at around 150 against the dollar50 yen.
With the JPY likely to fall around 150, options traders will be keeping a close eye on Japan's inflation data on 27 February to see if it can be a catalyst for the JPY to break out of its tight range. Bank of Japan Governor Kazuo Ueda hinted last week that he remains confident in the prospects of achieving stable inflation, which some analysts said was an indicator of policy change.
If the JPY does not break out of the range, then it seems likely that the implied volatility of USDJPY will continue to slide.
Ruchir Sharma, global head of FX options trading at Nomura International PLC, said"Our baseline** is that one-month volatility will fall to 625-6.75 intervals. "According to him, this is not only due to the strength that maintains the pair's range-bound movements, but also trading factors that may come into play.
Sharma said some clients have opened options positions that will benefit from the euro's slow move higher in the coming weeks. "Traders will need to sell USD JPY volatility to hedge themselves against the increase in the value of these trades, further dampening volatility. "He said.
An example of such a trade would be the purchase of a call option contract that contains a reverse knockout condition. In this case, the value of the call option rises as the USDJPY exchange rate rises, but it is important to note that if the pair is strong enough to reach the knockout level before the contract expires, it becomes worthless.