A glimpse on USD/JPY delta risk reversal, ATM vols and deferred Fed’s lift-off

From the above table, it is understood that 1 week ATM contacts of USDJPY have gradually reduced implied volatilities after the much awaited fed's meet which did not evidence any change in its rate policy that could have propped up dollar's strength, on the other hand delta risk reversal for the pair is still highest negative values after EURJPY among entire G7 currency space for next 1-2 months.

We reckon that for next 2 months time Yen may pretty much gain as lots of manipulations and ambiguities are surrounding around dollar. On one hand the rate hike expectations are still lingering around dollar as the regional fed heads are making manipulating statements on this much awaited monetary policy outcome. William Dudley, the Fed President of New York and John Williams, the Fed head of San Francisco hinted the significance of rate hike in 2015 on Monday, on the contrary Evans of Chicago head still looks at it rigidly, thinks that it should unchanged end of H1-2016.

We can very much empathize with this Yen against dollar to gain slightly in short run (let's say next 2 months or so) with an anticipation of Fed may continue to hold on its rate stance until December. This would mean that market sentiments for this pair have been bearish for this pair.

The pair is likely to perceive higher implied volatility close to 10.8% of 1W ATM contracts (highest amongst the lot), thus we recommend deploying short put ladder spreads which would take care of potential slumps on this pair and significantly higher volatility times.