Option Markets Signal More Volatility in Dollar-Yen Post BOJ

Option Markets Signal More Volatility in Dollar-Yen Post BOJ

Dollar-yen has had a roller coaster ride and options market suggest there’s more turbulence ahead.

The pair’s one-week implied volatility is hovering near the highest since 2020 before the outcome of the Bank of Japan’s policy review on Friday. This indicates a 75% probability that spot will trade in a seven-point range of 131.05 to 138.08 during the period, with a reference level of 134.55.

Pressure is growing for the BOJ to adjust its policy settings as a slide in the yen to a 24-year low tests its resolve to keep yields in check. A tweak to its yield-curve control policy is likely to be met with gains in the yen, while a decision to stand pat risks putting the currency at the mercy of swings in US yields.

Whichever way the BOJ leans on Friday, the options market suggests that spot is unlikely to hold around the 134 mark for much longer.

One-week implied volatility near highest level since 2020

Indicates 75% probability spot may trade in seven-point range