Lower USD/JPY still favoured – Danske Bank

Arne Rasmussen, Head of FI Research at Danske Bank, noted there is scope for the pair to edge lower in the next months.

Key Quotes

“In USD/JPY the election risk premium priced in FX options has dropped significantly as the opposition parties still struggles to gain momentum”.

“Market is pricing O/N forward volatility at 12.1%, corresponding to a breakeven in USD/JPY of less than ½ figure move in a on e-day forward straddle maturing on 23 October. For comparison, O/N volatility traded at 15% around the FOMC meeting on 20 September and 35.25% on the UK Brexit Election Day on 23 June 2016”.

“Given the current low election risk premium, we see risks skewed t o the upside for USD/JPY volatility and downside in USD/JPY spot, which is likely to materialise if the opposition manages to regain momentum. From a risk/reward perspective, we still see value in buying USD/JPY put options with maturity on 23 October to play a rebound in election concerns”.