Excuse my ignorance, but what the f*ck is "LFO?"
The acronym stands for Low Frequency Oscillation, but that doesn't tell you much. The waveform of the oscillation is used to change the characteristic of a sound; pitch/frequency, volume, filter, etc. Low frequency means it's below the human audible hearing range. Usually 60hz or lower. On the PCE, it's mostly commonly used to do pitch bending on a note (back and forth / cycling). Usually on the tail end of a note too (key off):
(Aldynes)
Should be able to hear it in that video at the tail end of most long notes (it's wobbly in sound). The effect is called vibrato. Tremolo is another effect, but it effects the volume of a sound (not to be confused with a 'trem bar' which is incorrectly named, but more like the tremolo of a pedal effect).
Anytime you change the pitch in a sound via a cycle, you're modulating the sound. The pitch is based on frequency, so LFO used to do vibrato *is* frequency modulation (FM). But it's not the same type of FM used in synth context.
That type of frequency modulation is done at a frequency high into the human audible detection range. It's so fast that it creates additional harmonics and tones in the final sound/output.
There are two problems with the 'LFO' feature on the PCE. 1) It's not strictly LFO, so I have no idea why it's named that. The frequency modulation has a multiplier setting and can get very high ranges, so it's not limited to LFO. 2) The PCE is a period based frequency generator, not a PHA (phase accumulator like the SID and other 'real' digital synths). So while this special mode for the PCE's first two channels is technically capable of 'FM', it lacks the necessary parameters to generate usable FM harmonic sounds in the note rage, let alone 'bending' any sound. And using it for vibrato is a COMPLETE waste of time. Some other audio chips have hickups when you change the frequency registers while a channel is playing and this type of setting it used to prevent that, but the PCE has doesn't have this problem. So it makes using this mode for vibrato useless and a waste of a channel. 2b) It sucks that the volume register of the 'modulator' doesn't effect the 'brightness' of the modulation (which is how it works in FM synthesis). That also makes it useless for trying to do traditional FM sounds or similar. Oddly enough, the volume is supposed to be silenced on the modulator channel when in this mode, yet the audio from the waveform still leaks through to the DAC, just not at full volume. Ryphecha, Exophase and I did a lot of testing with this mode a couple of years ago. Overall, it's rather useless in audio for music.
There are a small handful of PCE games that use the mode, and they use it for vibrato too ;-_-
That said, the 'lfo' mode used at higher frequency would be good for creating certain types of sound effects.