USD/JPY- Investors hedge against Japanese election risk

USD/JPY one-week risk reversals fell to -3.41 yesterday, its lowest level since May 1 while the one-week at-the-money option volatility rose to a 11-day high of 8.05.

The decline in the one-week risk reversals indicates that investors are hedging against the yen strengthening i.e. low cost out of the money (OTM) USD/JPY puts or JPY calls are in demand ahead of Sunday's Japanese elections.

There is widespread belief in the market that Abenomics weakened the Yen, thus a weak victory for Abe could put pressure on the USD/JPY (strengthen the Japanese Yen). Meanwhile, the new Kibo no To (Party of Hope) has said that it would work with the Bank of Japan (BOJ) on a smooth (QQE) exit strategy.

Hence, premium on the USD/JPY puts (risk reversals dropped) has jumped as investors hedge against Kibo no To's strong performance in the elections.