FX option markets have been focused on USD/JPY 150.00 since the initial drop from the mid 159's last week, but price action in this derivative suggests the biggest and most volatile moves may now be over and any deeper declines toward 150.00 will be harder fought.

Implied volatility is the market's gauge of actual/realised volatility risks, so it's been no surprise to see it surge higher across the 1- to 12-month expiry term structure beside the FX spot price drop. The benchmark 1-month expiry actually exceeded the late July intervention-led high at 10.65, spiking from 7.15 to an eventual 11.6 peak - a very significant increase. However, since USD/JPY's consolidation in the last 24 hours, 1-month expiry implied volatility has dropped back to 10.0, with other expiry dates easing beside it as longs book profits and others take advantage of the high premiums to benefit from short volatility strategies.

USD/JPY risk reversal options saw their JPY call over put (downside over upside) strike premiums ramped significantly higher as spot fell and downside options were sought - the benchmark 1-month expiry 25 delta contract from an already elevated 1.75 to 2.75 vol premium - but it's since dropped back to 2.15.

The demand for 150.00 JPY call strikes throughout the recent moves has rewarded holders from the lower spot and higher implied volatility as their value increased dramatically, but profits are now being booked there and demand has eased off. It's also worth noting the demand for JPY call reverse-knock-out (RKO) options - they remain sought due to being significantly cheaper than regular JPY call vanilla options, but the attached triggers are below 150.00, to suggest this level is a likely near-term floor.

Attention now turns to Friday's US CPI data, where FX options are demanding an elevated volatility risk premium given its potential to shape next week's Fed decision—itself already flagged as a heightened risk event by elevated implied vol pricing. The Bank of Japan's own policy announcement follows close behind on September 18, with markets largely expecting a 25-bp hike; the bigger uncertainty lies in the press conference, where clues on the pace and extent of further hikes could still move the pair. That layered event risk—CPI, Fed, then BOJ within days of each other—is keeping demand firm for options expiring just beyond each date. USD/JPY, in short, isn't out of the woods yet.
USD/JPY FXO implied volatility


USD/JPY 25 delta risk reversals

(Richard Pace is a Reuters market analyst. The views expressed are his own)