Political risks in France boost demand for euro bearish options, while USD/JPY options show a bearish bias

(1) Political and fiscal risks are rising in France, reigniting demand for euro put options, reflected in both short-term and all the way up to the 2027 presidential election expiration. (2) EUR/USD fell below 1.1200 on Monday, as weekend protests and an expanding spread between French and German bonds have again sparked budget concerns. (3) One-week and two-week risk reversal indicators shifted from neutral to favor euro put options by about 0.4, and the benchmark one-month 25 Delta contract opened in London at around 0.425, higher than last week’s approximately 0.25. (4) This rebound is moderate compared to the previous week’s decline, indicating downside risks remain, though unwinding of short dollar positions has already occurred to some extent. (5) Six-month implied volatility rose from about 6.3 to about 6.5, with the 25 Delta risk reversal indicating a euro put option premium of around 0.55, higher than the previous 0.4, showing a notable move for long-term events. (6) For USD/JPY, reports indicate heavy Japanese selling orders above 158 in the lower range, with the path of least resistance tilted downward. (7) USD/JPY implied volatility is far below recent highs, reflecting low actual and expected volatility. Risk reversals still show downside protection premium, but close to recent lows. (8) Going forward, attention will be paid to the October 28th Federal Reserve decision, the US midterm elections on November 3rd, and the US employment report on November 6th. This week’s earnings reports may also impact risk appetite and USD/JPY trends.