FX Options Markets See NIRP Ending With a Whimper

• Implied vol markets see the BoJ’s NIRP ending with a whimper, rather than a bang, as the overnight vol premium added ahead of the decision puts the implied spot swing below that of the December, January US jobs reports and the last BoJ rate decision on Jan 22.
• An overnight straddle expiring after the BoJ implies a ~100 pip swing for USD/JPY (background vol normally prices this at around 50 pips), a move that would put the pair within range of the recovery and cycle highs in mid-February at 150.89 in a JPY-negative scenario.
• Hedging markets assign scant chance of an outsized move in spot on tomorrow’s decision (6.8% implied pricing for the pair to trade above Y151.00 at expiry, 8.6% to trade below 147.00) – with a mild bias for USD/JPY upside in the wake of the decision.

Current options markets implied probability for post-BoJ NY cut:

• Above 150.50 17.0%
• Above 150.00 28.3%
• Above 149.50 41.4%

Spot 149.17

• Below 149.00 38.2%
• Below 148.50 24.4%
• Below 148.00 18.6%