S&P 500 Relies on Tech for Growth in Q4 2024, Says Barclays 
Meta-backed research finds exposure to ‘untrustworthy’ social media is rare. The fine print is less reassuring 
U.S. Banks Report Strong Q4 Profits Amid Investment Banking Surge 
Is Netanyahu’s star waning in Washington? His latest meeting with Trump suggests it may be 
Trump’s "Shock and Awe" Agenda: Executive Orders from Day One 
How an OpenAI safety test became a real-world cyberattack on the Hugging Face platform 
Indonesia Surprises Markets with Interest Rate Cut Amid Currency Pressure 
Moody's Upgrades Argentina's Credit Rating Amid Economic Reforms 
U.S. Stocks vs. Bonds: Are Diverging Valuations Signaling a Shift? 
Energy Sector Outlook 2025: AI's Role and Market Dynamics 
Lithium Market Poised for Recovery Amid Supply Cuts and Rising Demand 
Bank of America Posts Strong Q4 2024 Results, Shares Rise 
US Gas Market Poised for Supercycle: Bernstein Analysts 
The volatility smile most often signifies that traders are willing to pay higher implied volatility prices as the strike price grows aggressively out of the money.
Among G3 FX volatility space, EURJPY 3m-6m risk reversal is one of the highest compared with ATM volatility of the peer group, suggesting euro calls that sell topside skew.
The EURJPY volatility surface is offering very attractive opportunities because the skew on the 6m and 1y is currently excessive (refer above graph).
Is EURJPY IV skew mispricing? If we consider that the options market is pricing EURJPY risk reversals (RR) as the sum of EURUSD and USDJPY RR, the triangle is perfectly priced.
The implied volatility of 6m and 1y 25-delta strikes is trading about 3 volatility points higher than ATM volatility, which supposes that the implied volatility should be strongly negatively correlated with the FX rate.
Since 2013, the EURJPY RR has strongly mean reverted towards the vol/spot correlation. However, this correlation has been about zero for a few weeks, such that EURJPY 6m skew is now disconnected from its fair value.
Splitting the EURJPY RR into EURUSD and USDJPY components, like the market, exhibits the source of this mispricing. The EURUSD 6m RR is trading at -1.8 and the USDJPY at -1.1. The former is consistent with the EURUSD price action, which actually saw downside volatility.
However, USDJPY has indeed been positively correlated with its volatility, hence the EURJPY mispricing comes from the yen side. Investors could directly consider selling the USDJPY excessive skew, but we recommend selling the EURJPY skew instead. It offers a larger risk premium (due to the fairly priced EURUSD smile component), which is opportunistic given our bullish bias on the spot.
