USD/JPY risks still tilted to the downside – Danske Bank

Senior Analyst at Danske Bank Kristoffer Lomholt sees the pair grinding lower in the next months.

Key Quotes

“In USD/JPY, the political landscape is changing rapidly in Japan as the opposition is working hard to form a coalition ahead of the election on 22 October. Yesterday, news media reported that Yukio Edano, Deputy President of the Democratic Party, would split the main opposition party into two and form a new party for the left-leaning party members that are rejected by Tokyo Governor Yuriko Koike and her Innovation Party”.

“The market is pricing in one-day implied forward volatility (when adjusting for the weekend) at approximately 20%, corresponding to a breakeven in USD/JPY of less than a 1 figure move in a one-day forward straddle maturing on 23 October”.

“The relatively low election risk premium reflects that a more divided opposition increases PM Abe’s odds of winning the election. We still see risks skewed to the downside for USD/JPY spot and we see value in buying a 3W USD/JPY put option to position for a possible move lower in the spot and a further increase in implied volatility”.