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Downtick in Implied Cheapens Positioning for FX Vol Through H1'24

EURJPY
  • Today's downtick in EUR/JPY has prompted the fourth session of lower highs and lower lows for the cross, narrowing the gap with next support at the 159.76 50-dma.
  • Downside interest in the cross is evident in better volumes than average across FX options, with Y159.00 and Y157.00 put strikes drawing particular interest. In tandem, the front-end of the EUR/JPY risk reversals curve has shifted lower, with 3m risk reversals lower for a sixth session.
  • Analyst consensus remains for a recovery in the JPY next year, with EUR/JPY surveyed to fall to Y156 in six months' time - an outcome that options markets are now pricing an implied probability of 38% for end-May (vs. 48% at the beginning of November).
  • Such a move would erase the Oct-Nov rally, with the six month window also capturing not only the first fully priced ECB rate cut (April'24) but also the April BoJ decision, at which the Bank are seen having obtained sufficient data on wage increases that could trigger an exit of NIRP (See: 'MNI POLICY: Solid Wage Data Needed Before BOJ April Exit Talk' on November 24th).
  • The pullback in 6m implied vols this year has cheapened positioning for an uptick in volatility across the first half of 2024: Y156.00 end-May put strikes now command a premium 12.5 EUR pips, dropping to 9 EUR pips if a 164.30 (YTD high) knockout barrier is added.
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