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  • USD/JPY risk reversals have the highest level since July 26.  
  • The guage indicates the pair is likely to end the ongoing consolidation with a bullish move.  

One-month risk reversals on USD/JPY (JPY1MRR), a gauge of calls to puts, rose to three-month highs on Friday, indicating the investors are adding bets to position for continued strength in the US Dollar.

The gauge ticked higher to -1.20, the highest level since July 26.  The negative number indicates the demand or implied volatility premium for USD/JPY puts is still higher than that for USD/JPY calls.  

That said, the demand differential has weakened significantly over the last two months, as indicated by the rise in the risk reversals from -2.275 to -1.20.

More importantly, risk reversals continue to rise despite the recent sideways trend in USD/JPY. The pair’s ascent from the Oct. 3 low of 106.48 run out of steam at highs near 108.90 on Oct. 15 and the spot has been lacking a clear directional bias ever since.  

Risk reversals, however, have risen from -1.47 (low on Oct. 14), which indicates the options market is expecting USD/JPY to continue moving higher.