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Demand for Low Delta Options Shows Markets Wary of JPY Fallout

JPY
  • A fourth consecutive session of gains for one-week implied vols in USD/JPY, rising from 6 points on Tuesday to near 11 points this morning. Moves come as the contract is beginning to capture several tier one risk events - most notably Tuesday's BoJ decision and FX reserves update (confirming any October FX intervention, or lack thereof), the Fed decision on Wednesday and now Friday's Nonfarm payrolls release.
  • The move in vols pushes the breakeven on a 1w USD/JPY straddle to ~180 pips from ~100 pips earlier in the week. Demand for lower delta options strategies is also evident: 10-Delta 1m butterfly option vols have risen from 0.9 points at the beginning of October, to YTD highs of 1.6 points this week.
  • Analyst consensus looks for the pair to moderate to Y145.00 at year-end, but options markets are pricing in greater implied odds of the pair ending the year above Y150: up to 41% this morning from 37% last Friday, and 35% one month ago.
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