FX Options Insights 18/09/24

High option pricing suggests that there will be significant trading interest in the yen's response to a widely anticipated Fed rate cut. However, there is less certainty that a supersized 50 basis point reduction or dovish dot-plot projections will result in an instantaneous surge in the Japanese currency. This is partially due to the relative confidence in the U.S. economy and the dollar. The S&P 500 continues to trade near a record, the Atlanta Fed's GDP barometer indicates that U.S. growth is operating at 3%, and Treasury 2-year yields are already hovering near a two-year low at 3.63%. The report of a significant increase in single-family homebuilding in August on Wednesday further strengthened the U.S. growth outlook. The volatility of the market, including the yen, is mitigated by this confluence of factors. Furthermore, the Japanese central bank is less inclined to reiterate its hawkish posture at the upcoming policy meeting on Friday in light of Finance Minister Shunichi Suzuki's remarks this week regarding the yen's influence on growth. A wait-and-see policy approach is also indicated by the upcoming LDP elections and the Tankan report, which is due in October. The last two days' flows suggest a more cautious approach to purchasing the yen. Despite the fact that Asia accounts are offloading the U.S. currency, short USD/JPY positions have either been unwound or protected in advance of the Fed. Risk reversals are currently trading at a low point, close to a two-month low, despite being broader on the day. The 160 point breakeven for overnight USD/JPY options should remain within the post-U.S. payrolls range of 139.58 to 144.20 for the session. Trading will become increasingly engaging as it transcends these constraints.