Implied volatility is a component of an option pricing model.
In a nutshell, an annualized expected move in an asset (USD/JPY in this case), adjusted for the expiration duration.
Higher IV means higher priced options (more expensive to lock in ‘protection’ via options).
Volatility is up because of the large yen seings we are seeing.
Back in the middle of May, the previous time we had a sharp USD/JPY sell-off I wrote:
is it just a reprieve? While the yield gap between the US and Japan has narrowed its still a nice carry. But, markets discount the future so the narrowing has brought on some offloading of USD/JPY. I suspect we’ll go from a fierce uptrend to something with more sideways action for a few weeks at least.
Just don’t ask me to get bearish on it yet, thats a bridge too far 😉
That was pretty much the case, USD/JPY traded back up to above 161.50. How much further will this sell off go this time? Let me know in the comments!
This article was written by Eamonn Sheridan at www.forexlive.com.
