JPY was at the fore on Monday as official intervention was seemingly realised to boost the JPY. USD/JPY fell from above 160.00 to below 155.00 and after a further bounce and drop, it settled above 156.00.

Related implied volatility posted new 2024 highs in early Asia before coming under heavy selling pressure on the lower USD/JPY, which might suggest the market expects the BoJ to be successful in reducing realised volatility and further JPY weakness. The benchmark 1-month USD/JPY implied volatility traded above 12.2 in early Asia and ended nearer 10.0. One-month expiry risk reversals have halved their downside over upside strike premium and butterfly spreads have also seen sharp retracements.

Elsewhere and shorter dated implied volatility is underpinned before Wednesday's U.S. Federal Reserve policy announcement and Friday's U.S. NFP data, although improved risk sentiment should limit any more near term gains. EUR/USD 1-month sits around 6.1 on Monday, Cable 1-month at 7.0 and AUD/USD around 9.0.

If FX volatility remains suppressed over the next few sessions, traders should be aware of the effect from large FX option strike expiries and month-end FX rebalancing flows.

One-month USD/ZAR expiry now includes the South African election and its implied volatility will act as a FX volatility bellwether.

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(Richard Pace is a Reuters market analyst. The views expressed are his own)

((Richard.Pace@Thomsonreuters.com))