USD/JPY vols are underpinned after the earlier break of 114.50 barriers. Prices have not extended beyond the European morning highs, with spot managing to rally out of the lows after finding support at 114.45, which is a 50% fibo from the 109.00-119.90 move. Gamma related bid interest also emerged amid end user demand for short dated strikes after 114.50 barriers gave way.
Some players have shied away from 1-wk vols, which are trading at a lofty 9.15/9.90. This has benefited contracts like the 3-mth, which has seen players look for exposure to vol but at slightly cheaper levels. A couple of players have been touting spread trades, with vols at these levels and reversals also expensive due to the lofty level of JPY call skew. We are now in territory where a number of players are exposed to decent positions, with large size interest changing hands into the low 114's over the last week or so.
Position traders are still running interest into the 113.45 trend low. A break of this level would change the vol landscape into the new year and would have long-term implications for vega going forward. Historically we are still trading at relatively low levels and there could still be considerable upside potential for vols going forward.
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