Currency investors are bracing for whipsaw trading in the yen heading into the Bank of Japan’s policy announcement Thursday.
The cost of insuring against overnight swings in the dollar/yen currency pair, called the implied volatility rate, has surged to its highest level since at least 2011, according to Thomson Reuters data.
The implied volatility rate rose to 35.05% Wednesday from 7.875% on Tuesday.Also at MoneyBeat:
The rate is so elevated in part because the options contract covers volatility stemming from both the U.S. Federal Reserve and the BoJ’s policy decisions. The dollar/yen was little changed after the Fed on Wednesday afternoon released a policy statement acknowledging that the economy remains mixed.
The Bank of Japan, combating the perception that it has run out of policy tools, carries greater risk for investors.
“A lot of expectations have built up going into this meeting,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. Mr. Esiner expects the BoJ to ramp up its asset buying program and expand its negative rate policy to some bank loans.
But it’s unclear how the market will react to the BoJ’s decision. Consider the yen’s recent rally. The currency has been one of the year’s best-performing currencies despite the BoJ’s move into negative rates in January, which should have made the currency less attractive to investors....MORE
The Bank of Japan’s Monetary Policy Pickle
