Dollar-Yen Volatility Shows Traders Bracing for Policy Meetings

Updated on
  • One-month implied volatility for pair close to one-month high
  • Greenback set for weekly gain versus yen on policy divergence

A measure of the dollar’s expected fluctuations against the yen stayed close to its highest level in four weeks as investors prepared for central-bank policy meetings in the U.S. and Japan that will be held on Sept. 20-21.

One-month implied volatility jumped the most in a year earlier this week after Federal Reserve Vice Chairman Stanley Fischer became the latest Fed official to flag that U.S. interest rates may rise by December. Chair Janet Yellen is scheduled to speak in Jackson Hole, Wyoming, on Friday. The dollar headed for its first weekly gain versus the yen in more than a month on bets the Fed will tighten policy this year while the Bank of Japan eases.

“We will probably come out of it still pricing about a 50 percent probability of a rate hike this year and we go back fairly quickly to watching the data for direction,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. “Investors are, on balance, thinking that the BOJ will do something aggressive and the yen will go down. But there’s a good deal of uncertainty in both directions, which is holding vol up.”

The dollar was little changed at 100.55 yen as of 8:34 a.m. in New York. It slipped 0.2 percent to $1.1286 per euro. Fed funds futures indicate a 56 percent chance the U.S. central bank will boost rates by December.

One-month implied volatility for the dollar versus the yen, a measure of anticipated price swings based on options, climbed to 14.9 percent Aug. 23, the highest level since July 25 on a closing basis. Its premium over one-week contracts, which are too short to reflect the central banks’ September meetings, widened to 4.3 percentage points Wednesday. That’s the most since July 20, on a closing basis. The spread narrowed to 3.4 percentage points Thursday.

Japanese inflation data for July that’s due Friday may further highlight the pressure the BOJ is under to boost easing measures, said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. National CPI will show an annual inflation rate of minus 0.4 percent, unchanged from June, according to a survey of economists by Bloomberg.

“I do not expect much more movement on dollar-yen going into the conference,” Nguyen said, referring to Jackson Hole. “Over the past week we’ve had these dips below 100, but we always came back above the 100 mark, and I think that’s because there is speculation that the Bank of Japan will do something.”

— With assistance by John Ainger

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