USD/JPY vols slide in the short end of the curve, with the 1-wk trading down to 5.90%. Current indications are 5.75/6.50, with spot trading in familiar territory. Spot will need to post a sustainable move through key levels in order to bring the curve higher. Near-term risk for USD/JPY is skewed to the topside, yet vol accumulation on spot gains is severely reducing potential.
An overhang of gamma coupled with a slowdown in price action is undermining the short end. Equally, front dated vols suffer and steady sellers have been noted. Yesterday's large 88.00-120.10 DNT that traded at 28.75%, with a USD 15 million is adding to the offered tone. The expiry is for March 29th 2008 and is fueling supply via vega in the back end. 1-mth vols show 6.30/6.55, 3-mth is at 6.40/6.65 and 6-mth and 1-yr vols trade at 6.50/6.75 and 6.70/6.90 respectively. Elsewhere, a 1-yr 109.00 JPY call traded with a 120.50 Knock Out in the European morning over 1-yr.
130.00 strikes have also been popular, with a 1-yr JPY put going through at 7.35% and 11-mth trading at the same level yesterday. Plain vanilla interest has been mixed, yet skewed towards the topside in the main. A 121.50 JPY put traded at 6.55% and an O/N 119.00 went through in USD 500 million early on in the European morning. Risk reversals have come in as a result of the topside activity, with 1-wk 25-d coming in to show 0.00/0.75 and the 1-mth now at 0.35/0.65.
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