Synopsis:

BofA highlights heightened risk premium in USD/JPY options ahead of next week's August Nonfarm Payrolls (NFP) report. Recent data surprises and revisions have led to significant market movements, with USD/JPY showing the highest implied volatility spread for NFP events this year. Structural bearish factors for JPY remain but are overshadowed by current market dynamics.

Key Points:

• Market Reaction to NFP:

  • The market has reacted strongly to previous NFP data and subsequent revisions, resulting in increased volatility and risk premium for USD/JPY and AUD/USD.
  • USD/JPY is showing the highest 1-week to 2-week implied volatility spread among all NFP releases this year.

• Current Risk Premium:

  • Implied volatility for USD/JPY is significantly elevated, with a spread of more than 1 vol compared to the 1-week implied volatility.
  • This heightened risk premium reflects investor anticipation and uncertainty surrounding the NFP release.

• Structural Factors:

  • Despite persistent bearish factors for JPY, these have been less prominent in August.
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• Potential Market Impact:

  • A positive NFP surprise could drive USD/JPY towards BofA's forecast level in September.
  • Investors are closely watching the data for any significant shifts that could impact market positioning.

Conclusion:

BofA observes that market risk premiums for USD/JPY are elevated ahead of the August NFP report, reflecting increased uncertainty and volatility. With a positive NFP surprise potentially driving USD/JPY towards the forecasted 150 level, investors should monitor the upcoming data closely for its impact on currency movements.