FX options warn of LDP election risk to USDJPY
Sept 26 (Reuters) -The outcome of Japan's ruling LDP leadership race, which will determine the next prime minister, could have implications for the country's monetary policy, so USD/JPY FX volatility risk premiums are climbing in anticipation of Friday's vote.
Overnight expiry options now include the results and there's been a significant increase in related implied volatility. FX volatility is an unknown, yet key parameter of an FX option premium, so implied volatility is used as a stand-in. A perfectly priced option should see actual volatility match implied volatility, so the latter is a decent bellwether for the former over major events, such as Friday's LDP election.
Overnight expiry USD/JPY implied volatility has increased from 17.0 to 26.0 since Wednesday - a premium/break-even of 103 JPY pips to 157 JPY pips in either direction. There's been demand for options expiring through next week, too, with 1-week expiry implied volatility increasing from 11.5 to 14.5 this week. Dealers note more interest to buy USD calls, than put options, which would benefit more from any volatility being accompanied by USD/JPY gains.
USD/JPY is more likely to trade higher if one of the three leading candidates, Sanae Takaichi, wins the contest. She recently said that the central bank should maintain ultra-low interest rates to support Japan's fragile economic recovery.
For more click on FXBUZ
USD/JPY FXO 1-week and 1-month expiry implied volatility https://tmsnrt.rs/3zH1f1R
Overnight/next day expiry USD/JPY FXO implied volatility https://tmsnrt.rs/4gTiqyj
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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