Implied volatility shows sanguine dealers

Less than 10 hours on Wednesday through Thursday will have separated the policy decisions and statements of the US Federal Reserve and the Bank of Japan.

You would think the proximity of such "risk events" might cause traders in the US dollar/Japanese yen cross (USDJPY) to display some nervousness.

Not according to the traditional conduit for such angst: implied volatility, or vol.

At mid-session on Wednesday, the USDJPY one-week implied volatility was hovering around 8.5, well below the year's high of near 16 hit in January.

Dealers are more sanguine over the medium term, too, with one-month vol of just 8, down from more than 12 in January and flirting with six-month lows.

The reason for the dip in vol is mainly that the cross has been stuck in a relatively tight range between roughly Y118.50-Y120.50 for the past several weeks.

But of course it is when things are quiet, too quiet, that an ambush can prove most devastating.

Markets may be more vulnerable than usual to a central bank shock.

Yet perhaps we are looking in the wrong place. Keep an eye on the euro versus the yen (EURJPY), where one-month vol is 10.2.

The single currency has strengthened to a near four-week high, bolstered of late by a sharp tightening in 10-year bond yield differentials.

The spread, a record wide of 25bp in favour of JGBs last week, is now just 14bp after the sell-off in Bunds.

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