• The FX volatility upon which options thrive is unknown, so implied volatility becomes its proxy

• Overnight FX option expiries now include Friday's BoJ policy decision so their implied volatility is telling

• Overnight expiry USD/JPY implied volatility reached 15.0 before Wed's Fed - double the recent average

• However, it's since dropped back to 10.0 - so around 2.5 above the recent average - low FX risk premium for BoJ

• Premium/break-even at 10.0 vol is 68 JPY pips in either direction vs 51 JPY pips at 7.5 (102 JPY pips at 15.0)

• Broader FX option implied volatility has dropped back to prior 2026 lows after paring Wed's Fed risk premium
Overnight expiry USD/JPY FXO implied volatility


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