1. FX Outlook
  2. FX Options Weekly

Macro and Vol Commentary

Central bank decisions last week have caused volatility in the market, but has the BOJ meeting this week changed the course of USDJPY?

Economic Overview

  • GDP in Japan is declining, with Q/Q growth at -0.7% on an annualised level, Q/Q growth which is seasonally adjusted to -0.2%. Private consumption showed weakness and grew at an amoebic pace of 0.1% Q/Q, below expectations of 0.3%, with business spending at 1.5% Q/Q.
  • The leading index CI increased marginally from a revised 98.2 to 99.0, we anticipate the longer-term downward trend to persist in the near term as the global economies slow, and Japan is no exception.
  • Household spending beat expectations in October at 1.2% Y/Y, but it is down from 2.3% Y/Y the month before. Real cash earnings are declining at -2.6% Y/Y, which was lower than the revised -1.2% the month prior. We see this trend gaining strength in the near term as inflation continues to rise, but the labour cash earnings at 1.8% are also falling.
  • Retail sales edged higher on the month by 0.2% compared to 1.2% the month prior. The leading sales figures were 3.9% and 1.8% for apparel and food/beverages, respectively. Durable goods declined, with autos down 6.8%, household machines at -0.4%, and fuel at -0.7%.
    • Vehicle sales are taking a hit, growing by 1.0% Y/Y in November, vs 19.7% during the previous month, as consumers choose to cut down on non-essential purchases.
    • As a result, machine tool orders continued to decline, with the November figure at -7.8% Y/Y
  • The lower consumption and spending will lead to lower earnings from companies, but employment is still strong, which will give the economy some strength. The unemployment rate in October was 2.6%, but the participation rate is starting to fall and stands at 62.8%.
  • The service industry continues to decline, although it remained broadly expansionary in December at 51.7, primarily supported by the National Travel Discount Programme.
    • The input prices, however, rose at a historically sharp pace, and the growth rate was one of the sharpest on record.
    • PPI continued to increase, up to 9.4%, up from 9.1% in the previous month.
  • Inflation growth in Japan has been slower than in other nations and did not keep up with its counterparts in the West, as the energy inflation shock was less prominent. Still, the November reading showed continued growth to 3.7% Y/Y, the 1982 high.
  • The core inflation exceeded the BOJ’s target of 2.0% for the seventh straight month, with the yen’s historic fall amplifying the trend.
  • The forecasts expect the inflation to cool next year, with the support of government subsidies, but the overall price stickiness is to prevail in the longer term.

Central Bank

  • Even with inflation growth not seen abating in the immediate term, the country’s central bank abstained from a tough monetary tightening policy, keeping the policy balance rate at -0.1%, unchanged since 2016.
  • However, the BOJ shocked the markets by doubling a cap on 10YR yields to 0.5% while keeping the short- and long-term interest rates unchanged.
  • This sparked a jump in the yen to 132.28 and a slide in government bonds as markets interpreted the move as a start of stimulus policy exit, which could open the door for a rate hike in 2023 under a new governorship.
  • While the governor reiterated that the move serves to improve market functioning and smooth out the yield curve, this risks further eroding confidence in the central bank’s messaging to the markets during the next meetings.
  • In recent months, the CB had stuck to a dovish stance by stressing the need for stimulus to continue under stronger wage growth materialises, ruling out the possibility the BOJ would take action against the yen’s slump.

The Bank of Japan has been the outlier among major central banks for most of this year, sticking to the view that price gains are temporary and abstaining from raising borrowing costs as a result. This stance drove the yen to 32-year lows against the dollar, at 151 in October. However, this week’s unexpected hawkish move has sparked a strong rally in the yen, driving it back to 132, the August high. This opens the path for further policy normalisation but tightens the domestic financial conditions at a time when the economic outlook is deteriorating. Still, we expect a wave of capital returning to Japan, driving the yen strength into the year-end, with the upside targets of 130 and 125.

Sources: S&P Global, Economic and Social Research Institute Japan, Ministry of Internal Affairs and Communications  

Volatility Commentary

BOJ surprised the market by increasing the tolerance band to 50bp around 10yr yields. None of the 47 economists surveyed ahead of the meet had expected this. Despite Kuroda’s best efforts to communicate this as not a change in policy, the JPY gained 3% against the dollar in a sharp move higher. Realised 1m vols jumped from 15.3% to 19.7% post meeting. Looking ahead to 2023 creates increased uncertainty. 1m implied is 3% higher but the shift in policy coincides with the FED rate hiking cycle and the terminal rate being priced higher. Therefore, although we see USDJPY heading lower in the near term, we expect the move to be limited and prefer to benefit from the higher vol.

USDJPY 1-month Realised vs Implied Volatility

Realised Vs Implied (8)

USDJPY Trade Idea

  • SELL USDJPY call ATM with KI above 135
  • Structure at zero cost. Short vega and short delta.

Positioning Charts

USDBRL NDO Positioning Data 06/12/2022 - 13/12/2022

This week for the USDBRL there was less volumes and the options that were traded had a lower notional value suggesting reduced conviction. The range tightened slightly from the week prior, with no option traded below 5.00. The trend is still in favour of USD strength with very few put options traded below stop. Call option volume was minor and traders are expecting the pair to remain broadly unchanged.

Usdbrl 6 13

USDBRL NDO Positioning Data 13/12/2022 - 20/12/2022

Usdbrl 13 20 (2)

USDCNY Vanilla Positioning Data 06/12/2022 - 13/12/2022

The options market for USDCNY shows a preference to USD strength, in the week ending December 20th we can see more call options traded. The range for options also seen shifting above 7.30, highlighting the USD strength and the calls get bigger in notional value into the new year; upside cover reaches 7.70. At the same time the size and range of puts reduced, suggesting a lack of selling appetite for the pair. The options market suggest we will continue to see USD strength.

Usd Cny 6 13 (1)

USDCNY Vanilla Positioning Data 13/12/2022 - 20/12/2022

Usd Cny 13 20 (2)

USDJPY Vanilla Positioning Data 20/10/2022 - 20/11/2022

Options traded in December show that sentiment weakened, with traders betting on lower prices with some below 110. The majority of options traded in the near term favour the downside but there are a number of call options with strikes up to 160; this is down from 170 seen in November. Longer dated options are more split, and the range widens to reach 110. We expect prices to consolidate between 1.05 and 1.10 in the near term.

Usd Jpy Oct Nov

USDJPY Vanilla Positioning Data 20/11/2022 - 20/12/2022

Usd Jpy Nov Dec

Charts and Tables

FX Expiries

Expiry (30)

Historical Spot FX Volatility (30D Rolling)

Chart (25)

FX Matrix (today)

Spot (83)

Weekly Change

Week (64)

Key Events & Releases

Calendar (96)

Technical Charts

JP Morgan Global FX Volatility 


The index has improved in the recent sessions and has breached the 50 MA resistance level once again to settle at 10.34. The stochastics are falling, with %K/%D converging on the downside and now declining out of the overbought, a strong sell signal. Likewise, the MACD diff is positive and converging, suggesting we could see a push lower in the near term. The index needs to break back below the 50 MA at 10.00 before it can target the 9.50 level. On the upside, the break above 100 MA at 10.60 could pave the way for trend resistance at 11.70. The resistance at this is seen to firm, and the indicators suggest that we could see the index weaken. If this materialises, then we could see further downside, which would solidify the outlook for lower prices in the near term.

Dollar Index 


The dollar index has been weakening in recent weeks, but support at 103.50 prompted the index to settle at 103.88. Prices broke below the support level of 50 100 MAs at 104.31 in recent days and today’s losses are moderately bid. The stochastics are confirming the downside momentum, with %K/%D falling after converging on the downside. The MACD diff is positive and converging marginally, suggesting we could see prices edge back to the 103.50 level, where the index might find near-term support. If this support is breached, we could see significant downside momentum to 103. On the upside, if resistance around the 50 moving average does not hold firm, this could trigger gains back to 100 MA and 104.78, a robust resistance. The most recent weakness and indicators suggest we could see the index weaken further in the near term.



The pair has weakened so far in December and sold off recently below 135 and now stands at 132. The stochastics are rising but the momentum is seen slowing and converging, but the MACD diff just converged on the upside, suggesting we could see the pair push higher in the near term. The pair needs to hold above 130.58 before targeting 135 once again. The reaffirmation of near-term support at the moving averages could see the market push higher. On the downside, rejection above 132 could trigger a break of support at 130. The indicators paint a mixed picture, but support at the current levels is seen forming, and we could see some moderate upside in the near term.



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