The yen may have slumped to within a whisker of levels that saw Japan intervene in the currency market last year, but options traders see little need to prepare for a jolt from authorities in Tokyo.
(Bloomberg) — The yen may have slumped to within a whisker of levels that saw Japan intervene in the currency market last year, but options traders see little need to prepare for a jolt from authorities in Tokyo.
One-week implied volatility in dollar-yen, a gauge of expected movement in the currency pair over the period, is drifting slightly higher but remains close to the lowest level this year.
That signals option traders see little likelihood of intervention even if the yen weakens to 145.90 — which saw authorities wade in last September — or the view that Japan entering the market wouldn’t be too disruptive. It traded at 145.60 at 7:43 a.m. in Tokyo Wednesday.
While Finance Minister Shunichi Suzuki said Tuesday that he’s watching market trends with a “sense of urgency,” traders and government officials appear to see the speed of movements as more important triggers than specific levels.
“Suzuki’s verbal intervention is at level four out of seven on our verbal intervention scale,” said David Forrester, a senior FX strategist at Credit Agricole CIB in Singapore, adding that seven indicates actual intervention is imminent. “Implied volatility would pick up if verbal intervention were to become more forceful and if Suzuki said FX movements are ‘clearly one-sided, excessive and/or not reflecting fundamentals’.”
Read more: A Trader’s Guide to Japanese Policymakers’ Language on the Yen
Bank of Japan Governor Kazuo Ueda surprised many investors last month in a post-policy meeting press conference by saying that foreign exchange volatility had been a factor in the BOJ’s decision to adjust its monetary program. The policy tweak effectively lifts the cap on 10-year bond yields to 1% from 0.5%.
Yet while higher yields would typically be expected to support the currency, the yen has continued to depreciate and this week touched the weakest in nine months amid a persistently wide interest-rate gap between the US and Japan.
Even if the Ministry of Finance decides to intervene in the market, which it does by directing the BOJ to buy and sell currencies, there is no guarantee that it would stem the slide.
After initially rallying following intervention in September last year, the yen weakened further, as far as 151.95 per dollar, which spurred two more interventions in October before the trend started to change. The three interventions cost about 9 trillion yen, or about $62 billion at the current exchange rate.
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