Option strikes
Investors see USD/JPY downside as much more likely than upside but seem keen to buy into that dip. According to CME Group data on option strikes:
There is net demand for USD/JPY calls intermittently between 150 and 153, with larger demand between 145 and 148 and another good-sized cluster at ~141 (Chart 3).
In contrast, there is demand for USD/JPY puts between 157 and 160, and some additionally near 165, but these are much smaller than the demand for calls at lower strike prices.
What to Watch: Looking ahead, the next Fed (on June 12) and BoJ (on June 14) rate decisions loom large. Before these important meetings, in the U.S. watch out for the FOMC minutes (May 22), U.S. PMI data (May 28) and PCE readings (May 30 and 31). In Japan, we will be watching trade data (May 22), inflation readings (May 24) and industrial production (May 31).
FX investor risk appetite
CME Group has a range of FX volatility data to help investors track the level of volatility. We can also use FX volatility data to determine investor risk appetite. We find the shape of the FX volatility curve useful in this regard. When shorter-dated FX implied volatility is higher than longer-dated volatility, this suggests investors are worried or in panic mode. In contrast, when shorter-dated FX volatility is lower than longer-dated volatility, this suggests investors expect calm markets. The latest data finds:
The FX volatility curve currently remains at steeper levels than throughout 2023, although in recent days it has edged slightly closer to neutral (Chart 4). This suggests investors remain calm, likely because economic growth has stabilized and conviction remains that easier central bank policy is coming this year.
The move aligns with CME Group’s CVOL volatility indices, which have followed a similar dynamic to trade near year lows.
Outside FX, equity volatility remains historically low, while rates volatility remains historically high.
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