Implied volatility gauges actual volatility expectations over the life of an option and can therefore offer clues on the perceived outlook and there's a clear theme in JPY-related pairings since Wednesday's Bank of Japan policy announcement.
Option pricing correctly predicted the excessive volatility that was fuelled by the BoJ leaving policy unchanged this week, and subsequent pricing shows dealers shifting volatility premiums to the March meeting.
USD/JPY implied volatility for all expiry dates was hit hard as BoJ risk premiums were priced out in its wake, with benchmark 1-month expiry falling from pandemic-era highs at 17.0 to 12.4.
However, since settling lower, 2-month expiry implied volatility is now much higher than all other benchmark dates and 3-4-month are also probing above 1-month, which is unusual.
This anomaly shows option dealers are expecting increased USD/JPY FX volatility ahead of the 2-month expiry date which falls just after March 10 BoJ meeting.
The following policy meeting is April 28 and the first with a new BoJ Governor after Haruhiko Kuroda steps down on April 8 and will be captured by 3-month expiry from Jan.
Recent option trade flows show increased demand for JPY call options that allow holders to sell USD/JPY at lower levels with expiries in this same 2-4-month zone, with the most popular strikes being around 125.00.
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