USD/JPY stays vigilant on the upcoming elections – Danske Bank

Mathias Mogensen, Analyst at Danske Bank, gave his views on the prospects for the pair and Sunday’s elections.

Key Quotes

“USD/JPY gained last night with the cross rising above 112 on reports that US and North Korean diplomats may meet in Moscow later this week”.

“Financial markets seem very complacent that Shinzo Abe will remain as Japan’s Prime Minister after the general election on Sunday, and there is hardly any election risk premium priced into the FX option market”.

“The ruling LDP party´s strong lead in the polls stands in contrast to the latest cabinet survey, which showed another decline in Abe´s cabinet approval rating from 44% in September to 37% in October. Moreover, we note that a large share of the voters have still not decided who to vote for”.

“Hence, from a risk/reward perspective, we see value in buying USD/JPY put options with expiry on 23 October after the latest bounce in the cross to position for a possible increase in implied volatility and/or decline in spot in the event of renewed election uncertainty”.