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FXO Market Update - USDJPY flying

Mathias Alrixon

OTC Derivatives Trading

Summary:  USD trades higher after US10y yield trades back up above 3.0% while JPY underperform as rate differential comes back in play. USDJPY vols are sharply higher with 1 month up 2 vol since Friday close and risk reversals has flipped back to favor calls, 1 month now 0.25 for topside.


Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
Source: Bloomberg, Blue: USDJPY spot, Black: USDJPY 1 month vol

USD trades stronger after US10y yield trades back up above 3.0% and JPY is sharply lower as rate differential comes back in play. USDJPY spot is up 200 pips from Friday close and touched 133.00 highs this morning, this is the highest level in 20 year.

Vols are sharply higher with 1 month USDJPY up 2 vol from Friday, now trading around 11.65, while 1 week is up 2.5 vol to 12.0. The whole curve is lifted with 1 year up 1 vol to currently trade 10.0. Risk reversals have flipped back to favor USDJPY calls out to 9 months with 1 month trading 0.3 for calls and 1 week at 0.60. The sharp move higher in vol has pushed the risk premium to just above 2.0 vol which makes USDJPY the most expensive currency pair in G10.

Next resistance comes in at 135-136 area and above that there is no targets before the 1998 highs at 147.66. We can’t rule out some corrections given the magnitude and speed of the recent move and we can expect BoJ to come in and try talk down UDSJPY when we get closer to 135. The trend is higher and the 135-136 resistance could easily be taken out if US10y makes new highs above 3.20. With that said we like to sell short dated USDJPY call with strikes at or above 135 after the sharp repricing of vol and risk reversals.

Sell 1 week 135.00 USDJPY call
Receive 20 pips

Alternative

Sell 2 week 136.00 USDJPY call
Receive 30 pips

Spot ref.: 132.85

Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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