USD/JPY Options Show Lukewarm Mood Before Fed, BOJ: Analysis

Investors in the options market are betting that next week’s meetings by the Federal Reserve and the Bank of Japan won’t be game changers, Bloomberg strategist Vassilis Karamanis writes.

While dollar-yen one-week implied volatility jumped 6.72 percentage points to 15.86 percent yesterday, it could have been a mere reflection of the tenor capturing within its expiry the Fed meeting slated for June 15 and BOJ on June 16.

The volatility level is dwarfed by the high of 17.72 percent seen three days before the BOJ’s April meeting and the year-to-date high of Feb. 12 set at 23.36 percent. 

Moreover, the premium investors pay to hedge price swings in dollar-yen over the course of the next week remains relatively low. The spread between one-week implied-realized volatilities traded as of yesterday at 2.54 percent, having narrowed from 3.16 percent on May 31; compares with year-to-date high of 7.93 percent set on April 26.

The probability of a larger move in the spot is hovering near a six-month low hit on June 6, 10-delta butterfly shows.

While the market now sees no chance of a rate move by the Fed this month, it is factoring in an 18 percent chance of an increase next month, compared with 53 percent a week ago, according to Fed funds futures pricing.

Investors also look for extra stimulus by the BOJ at its July meeting as the U.K.’s European Union membership referendum and Japan’s Upper House election shadow next week’s meeting.

Note: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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