The excessive yen skew premium Yen calls are in high demand for all crosses (see above graph) as the market is behaving in a risk-off way. As we wrote here and here, the yen probably met an inflexion point after months of strength.

It is bid this week just ahead of the election, but a Clinton victory remains the central scenario and would provide immediate relief.

 A Trump victory would pressure the USDJPY towards 100 but a break would not at all be to the BoJ’s taste, whereas the Fed is edging closer to a December hike, making a new rebound likely. Selling outright yen volatility or skew is not a reasonable trade given the imminent risk event, but selling the yen skew premium as a leg of a relative value trade appeals.

Stay short EURJPY rather than USDJPY skew, the EURJPY 3m skew is larger than the USDJPY skew (-2.1 vs -1.8), so that selling the former provides a higher premium.

Moreover, the EURJPY skew exceeding the USDJPY is not consistent in times of EUR topside volatility. On the contrary, euro bullishness should dampen the EURJPY skew, which is, therefore, an attractive Sell.

The spread between EURJPY and EURUSD 3m risk reversals is now very elevated historically, as it is exceeding 1.5 vols (see above graphs).

It never happened between 2012 and 2015 and such a situation happened only very transitorily this year. We expect the gap between EURJPY and EURUSD skews to tighten.