LONDON, Nov 6 (Reuters) - USD/JPY has so far been slow to follow other markets lower, but FX options are pricing more JPY strength, in line with a view at Citi that USD/JPY has further to fall.

Citi says many clients are asking why USD/JPY isn't falling further. Its Asia spot trader, Patrick Hu, doesn't have a clear answer. The bank still favours a stronger JPY from here, particularly against the New Zealand dollar going into the NZ election this weekend. It says the case is becoming clearer and more aligned.

Citi points to four factors. First, it sees limited topside for USD/JPY on technical grounds, with official warnings adding to that. Second, it expects the equity selloff to prompt more unwinds of FX hedges, which have supported the pair for most of this year. Third, it says the Bank of Japan is shifting gears: it has signalled it has met its price trend goal, and Citi reads its September minutes as pointing to a new phase focused on sustaining that trend, potentially with faster rate hikes.

The fourth was today's release of GPIF's second quarter fiscal year 2026 results. The fund posted a ¥5.25 trillion ($33.25 billion) loss on total assets of ¥319.8 trillion, but left its targets unchanged at roughly 25% for each of its four main asset classes. Citi hadn't expected a formal change, though it said a noticeable rise in the domestic share would have been enough to push USD/JPY lower. The government has discussed shifting GPIF's strategy toward domestic assets, but nothing has been decided.

The options market is leaning the same way. The premium for JPY calls over puts has risen. The benchmark 1-month 25 delta risk reversal moved to 2.1 from 1.8 in the last 24 hours. JPY calls give the holder the right to buy JPY, and puts give the right to sell it. A wider premium for calls means traders are paying up for protection against, or exposure to, a stronger JPY.

Implied volatility has also climbed. On Thursday, 1-month USD/JPY implied vol rose to 7.3 from 6.3, trading higher as spot fell in Asia. Rising vol alongside a higher JPY call over put premium on risk reversals, suggests the market is preparing for more downside rather than a quick rebound.

Together, the Citi arguments and the options pricing still point the same way, even though the GPIF catalyst didn't deliver, it maybe down to stock markets and broader risk aversion to decide whether USD/JPY breaks lower.($1 = 157.9000 yen)

USD/JPY FXO implied volatility


USD/JPY 25 delta risk reversals

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