Implied volatility is a component of the options pricing model.
In short, the expected annual movement in an asset (USD/JPY in this case), adjusted for the expiration period.
A higher IV means higher priced options (more expensive to secure “protection” via options).
Volatility has increased due to the significant appreciation of the yen that we are seeing.
In mid-May, the last time we saw a sharp sell-off in USD/JPY, I wrote:
- Is it just an exemption?
- While the yield gap between the US and Japan has narrowed, it is still a good opportunity. But markets don’t price in the future, so the narrowing gap has led to some selling in USD/JPY. I suspect we will move from a violent uptrend to a more volatile one for at least a few weeks. Just don’t ask me to be pessimistic about this, that’s a long shot 😉
That was almost the case, as USD/JPY bounced back above 161.50. How long will this sell-off last this time? Let me know in the comments!