USD/JPY: JPY call demand drops, signals fading prospects of deeper sell-off

• Risk reversals show a drop in demand or premium for JPY calls.
• USD/JPY recovery has stalled near the 110.00 mark.

The fading prospects of a deeper drop in the USD/JPY have triggered the unwinding of risk-off hedges initiated last week, the risk reversals show.

The one month 25 delta risk reversals (JPY1MRR) are being paid at 1.05 JPY calls vs 1.5 JPY calls. The decline in the implied volatility premium for JPY calls adds credence to the recovery in the USD/JPY pair from 108.11 to 110.00.

The JPY call demand could drop further after USD/JPY has found acceptance above the 200-day moving average (MA) located at 110.18. However, the corrective rally seems to have run out of steam at 110.00 as indicated by previous day's doji candle.

JPY1MRR

USD/JPY Technical Levels

Resistance: 110.00 (psychological hurdle), 110.18 (200-day MA), 110.48 (Feb. 2 high).

Support: 109.77 (session low), 109.47 (previous day's low), 109.00 (psychological support).