FX vols are transitioning from liquidity induced calm to fitful disorder created by recurring bond sell-offs. Upticks in rate sensitive long-expiry options and greater risk premium for carry FX/ EM vols are two potential trends to watch in coming months.  

Ahead of Wednesday’s BoJ meeting, which we expect to be more material than the Fed conclave on the same day, we discuss why tweaks to the BoJ’s easing program can extend these moves and deliver yen strength.

The outcome of Wednesday’s BoJ meeting is highly uncertain but those expecting a step-change in policy are set to be disappointed. 

Since the Bank of Japan’s (BoJ) last meeting USDJPY has been keeping above the 100 mark.

The MAS policy now appears more reactive to incoming data, resulting in unusual series of easing moves.

After neutral SGD NEER policy slope, band re-entering typically MAS’s next port of call.

One corner of the option market where the vol reaction has been less pronounced than in others are USDSGD forward volatility.

Understandably so, since SGD is not the highest beta risk proxy in EM and its jump propensity is less than others due to the managed nature of the currency.

This, however, leaves SGD forward vols screening cheap by virtue of depressed levels (a common feature of most Asian FX vols) and mildly positive slide along an inverted curve.

Consequently, upsize vega longs via 6M USDSGD straddles are encouraged and take profits on EURJPY shorts into this week's BoJ.

While the directional investors not given to delta-hedging can consider buying calendar spreads of USD call/BRL put one-touch options instead of straddles.

For instance, short 1M vs long 2M 3.40 strike USD call/BRL put one-touch calendars cost a net premium of 16% on mid (equal notional/leg). Assuming unchanged markets in a month’s time, the 1M 3.40 expires worthless and the 2M 3.40 rolls up to 40%, resulting in an acceptable static carry / payout ratio of 2.5 times.