Here's the BoJ risk to according to FX options
June 13 (Reuters) -The FX volatility upon which FX options thrive is gauged with implied volatility when setting the premium, making implied volatility a risk bellwether for impending events.
Overnight/next day expiry is the shortest duration option and any changes to its implied volatility and subsequent premiums therefore offer a insight to the perceived FX volatility risk attached to major events covered by its expiry, such as Friday's Bank of Japan policy announcement.
Overnight expiry implied volatility saw a justified risk premium increase after including Wednesday's U.S. CPI data and U.S. Fed policy announcement, as both events prompted a reactive increase in actual/realised volatility thereafter, which matched their break-evens. Overnight implied volatility has since retreated in all but JPY-related currency pairs and highlights the impending BoJ threat to JPY FX.
On Thursday in Asia, overnight USD/JPY implied volatility peaked at 18.5, just below the levels seen before the BoJ meetings in January and March, and significantly lower than the 30.0 peak ahead of the April 26 announcement when a policy tweak was anticipated.
At 18.5, the premium/break-even for a simple vanilla straddle is 121 JPY pips in either direction, compared to 10.5 implied volatility and 67 JPY pips premium/break-even before including this week's key events. This indicates that dealers are not complacent about the BoJ risk.
EUR/JPY overnight implied volatility reached 18.0 from 11.0 after including Friday's BoJ, a premium/break-even of 128 JPY pips from 78 JPY pips in either direction, before easing to 16.0 vol/113 JPY pips, since.
Dealers say end-user interest to buy JPY-related FX volatility protection over the BoJ meeting has been tame and there hasn't been a noticeable increase in options to protect against any particular JPY directional move, which shows a lack of expectations for any policy tweak and subsequent JPY reaction.
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Overnight expiry USD/JPY FXO implied volatility https://tmsnrt.rs/3VGvoXe
EUR/JPY Overnight expiry FXO implied volatility https://tmsnrt.rs/4bY2R5s
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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