Currency Volatility Surges in Options Market Before Fed, BOJ Decisions

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(Bloomberg) — Currency traders are girding for the biggest price swings in months in the build up to this week’s crucial Federal Reserve and Bank of Japan policy decisions.

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Dollar-yen was the most volatile, with the implied rate surging as high as 31.90, the highest since June 16 when the Fed hiked its benchmark rate by 75 basis points. Traders are watching if the BOJ will maintain rock-bottom interest rates a day after another expected rate hike by the Fed on Wednesday.

“The rise in overnight implied volatility shows the markets are growing increasingly nervous ahead of multiple central bank meetings in the coming two days,” says David Forrester, senior FX strategist at Credit Agricole CIB in Hong Kong. “The surprise 100 basis point rate hike by the Riksbank yesterday added to market nerves.”

Dollar-yen’s implied volatility level indicates there is a 73% probability spot will trade in a 141.13-146.24 range over that period. It was up 0.1% to 143.83 at 11:59 am in Hong Kong following an unscheduled bond purchase operation by the BOJ to cap 10-year yields at the 0.25% upper limit of its tolerated range.

Overnight implied volatility in the euro-dollar and sterling-dollar also surged as much as 14.65% and 17.84% respectively.

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