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Figure 1: USD/JPY, EUR/USD 25d 3m Butterfly Option
Source: MNI/Bloomberg
With 3m FX options now capturing the November 3rd elections in the US, currency markets are yet to show any material signs of stress or concern over the date of the election, with betting odds continuing to favour Joe Biden over the incumbent Donald Trump. This comes despite their contrasting policy views and leadership styles, but may be (partially) explained away by the wait until end-January for the new President to be sworn in.
Nonetheless, considerable policy uncertainty on both sides of the aisle as well as the ongoing disagreements over the next wave of Coronavirus aid support could make these contracts look underpriced in the coming months and as Congress returns on September 7th.
Abe resignation fails to move the volatility needle
The biggest news of the week came with the unexpected resignation of the Japanese PM Abe, which helped fuel a surge in JPY futures trading and a spell of JPY strength intraday, although this seems to have abated ahead of the close.
In options space, this translated to a flurry of USD/JPY put options trades, with well over $2 in puts trading for every $1 in calls after Abe's press conference. Put strikes layered between Y104.00 – Y105.00 drew the most attention but strikes at Y101.00 and Y99.00 also drew very healthy interest, suggesting some managers are looking to protect against a run higher in JPY in the coming months.
Despite the run higher in options volumes, implied volatility covering the near-term Japanese leadership contest as well as the November Presidential election look contained.
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