Risk of USD/JPY Weakness Seen in the Options Markets
The next Bank of Japan meeting is scheduled for 16 June which will be the second meeting with new governor Ueda in charge. There is a possibility that the Ueda will make changes to the BOJ yield curve controls. The market is starting to position for the risk of a downward move in USD via options.
Firstly, when the 1-month volatilities rolled to a date which included the announcement, we can see the 1-month traded volatility jumped about 1.6% (from 9.2% to 10.8%). This is in a market that was otherwise trending lower.
Secondly, we have seen on the same date the bias on the JPY calls (USD puts) increased from 1.2% to 1.7%.
The chart above shows the USD/JPY 1-month volatility in white and as a reference the 2-week USD/JPY volatility in blue.
The chart below shows the USD/JPY 1-month risk reversal in white and as a reference the 2-week USD/JPY in blue. The negative number shows that 25 delta JPY calls (USD puts) trade above the equivalent puts.
What is this big movement in the USD/JPY option volatilities telling us?
Firstly, is that there is now some movement expected from the Bank of Japan. This is something that we have seen very little of over the years. Secondly, we are expecting to see more volatility in the USD/JPY.
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