Yen Pre-BOJ Decision Volatility Wanes as Traders Scale Back Bets

  • Investors refrain from holding big positions: Sumitomo Mitsui
  • Overnight option volatility was two-thirds of July 28 level

Option traders expect the Bank of Japan’s policy decision on Wednesday to have a smaller impact on the yen than last time.

A gauge of the yen’s implied one-day volatility against the dollar on Tuesday was about two-thirds its level on July 28, the day before the currency jumped more than 3 percent following the central bank’s decision to keep bond purchases and interest rates unchanged. The BOJ is expected to disclose the findings of a comprehensive review of its policy framework after Wednesday’s gathering, which concludes just hours before the Federal Reserve sets rates.

“Because there are so many points of discussion at this BOJ meeting, many market players have scaled back holding big dollar-yen positions,” said Yasuhiro Kaizaki, vice president for global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “I have a feeling that the yen won’t rise past 100 per dollar even if there’s no change to the BOJ’s policy the way market positions are now. Any easing could spark momentary yen weakness, but won’t lead to a sustained decline.”

Overnight implied volatility for the dollar versus the yen was 31 percent Tuesday, compared with more than 50 percent on July 28.

The yen rose 0.2 percent to 101.50 per dollar as of 11:59 a.m. in Tokyo, after gaining as much as 0.5 percent. It has strengthened against most of its 16 major peers since July 29 amid speculation the BOJ’s easing is nearing its limit.

Slightly more than half of economists surveyed by Bloomberg forecast an expansion of BOJ monetary stimulus at the conclusion of its two-day policy meeting on Wednesday.

Markets are also focusing on the Federal Open Market Committee gathering. The futures-based odds of a rate hike are 22 percent for Wednesday and 58 percent for year-end.

“Because we also have the FOMC coming after the BOJ, I don’t think players are betting on any direction in a big way,” Kaizaki said. “As a result, the dollar-yen may not move much.”

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