1. FX Outlook
  2. FX Options Weekly

Macro and Vol Commentary

The yen gained ground in Q4'22 following the lift of borders for international travelling. With reopening confidence waning, and the BOJ outlook still uncertain, what is the outlook for the currency in the coming months? 

Japanese Economy

  • The country’s borders opened in October last year, and Japan saw a greater influx of travel subsidies and foreign tourists.
    • Service sector performance rebounded as a result.
    • Jibun PMI improved sharply back to 52.3 in January, up from 50.3 in October.
  • Japan’s GDP likely to have rebounded in Q4 2022, up from 0.8% contraction in Q3.
    • With 70% of the country’s coming from service and private consumption, these sectors supported growth.
  • On the other hand, housing and private capex are likely to have weakened on a real basis, reflecting higher pricing pressures felt by manufacturers.
    • Industrial production likely has remained negative, given the December figure of -1.20% y/y.
    • Business investment likely shrank, dragged down by higher prices and weak external demand for manufactured goods.
      • Overseas demand is diminishing at a rapid rate, with exports falling to January 2022 lows of 11.50%
    • Manufacturing PMI remained contractionary at 48.9.
  • After a slight boost of confidence in Q4’22, growth is set to slow in Q1’23, with inflation finally increasing in the country.
  • CPI grew by 4.0% y/y, 20-year highs.
    • In particular, the wage growth surprised strongly on the upside in January, growing by 4.8% y/y.
    • For an economy that has not seen strong inflationary pressures for decades, the transition will be dealt with much tougher than one might expect.
    • In particular, we expect consumers to be quite susceptible to price changes, especially for non-discretionary items and choose to cut down on their spending ahead of the crunch.
    • Likewise, consumer confidence is likely to tumble.


  • The central bank doubled the cap above its 10yr yield target to 0.5% in December, a move that intensified the expectations for a hawkish shift from the BOJ.
    • The bank spent $179bn in January to buy government bonds to keep yields under the cap.
  • This move has brought the expectation of further tightening in the economy, which is set to see inflation grow in 2023.
    • This, coupled with a high level of government debt, at 262% of its GDP, the most among the G7 nations, could bring a sharp shift for the consumers that have not seen positive interest rates in more than six years.
  • Key topic of JPY moves in recent days has been the change in BOJ governor that is set to take place in April.
    • The new nominee, Kazuo Ueda, was a surprise for the market, as he is thought to be less dovish than the current Governor; the yen jumped higher as a result.
    • Under Kuroda, the BOJ has urged for stimulus to stay in place until there are sufficient gains to support inflation once import prices settle.
    • However, Ueda is expected to be more likely to implement shorter-term policy decisions.
  • The markets are now speculating whether the yield curve would be removed under Ueda
    • In particular, many believe he will be compelled to increase rates in Q4’23 as inflation quickens.
      • The forward swaps are now pricing in an 18.5bps hike from now until the end of the year.
    • Still, Ueda warned against premature policy tightening and pointed out the difficulty of managing a soft landing to dismantle yield control.
    • With that in mind, it will be hard to judge Ueda’s policy objectives if he is appointed to be head of BOJ.

Japan’s monetary policy outlook is a hot topic and will drive the USDJPY price moves in the coming months. Many markets are also watching for March monetary policy meeting to speculate on a potential rhetoric change from the current Governor. Still, we believe that given the huge size of Japan’s government debt, any increase in interest rates will cause a devastating rise in interest payments. Hence, we are likely to see policymakers manage inflation without increasing interest rates. For the yield curve control to be removed without causing a strong market impact, policymakers have to ensure that real interest rates have come down low enough. Communication with markets will be key, as well as using the right language to hint at policy decisions without creating market shocks on speculation. Still, we expect a robust dollar, above 100, to weigh on yen performance until the new head of BOJ is firmly appointed. Our target range for USDJPY: is 130-138.

Sources: S&P Global, Ministry of Internal Affairs and Communications, Japan Machine Tool Builders' Association 

Volatility Commentary

Over the last few months of 2022 we saw vols realise significantly higher than implied with recent inventions in the currency and yield curve control. As per the above we see room for USDJPY to head higher up to around 138 which if the US continues to have strong economic numbers would be expected. Though the market is still pricing in the Fed to reach it’s terminal rate mid this year and potential for a pivot to rate cuts. As per the above the BoJ’s new Governor Ueda is in a tough spot when it comes to potential rate rises or the removal of yield curve control, though there are still expectations for him to put Japan on a path away from the current ultra-loose monetary policy. Below we suggest a trade that would benefit from USDJPY continuing higher in the short term but lower in the medium (6mth) term (which we’d expect if the Fed policy does pivot mid-year and we see any tightening on the BoJ side).

USDJPY 1-month Realised vs Implied

Realised Vs Implied (11)

USDJPY Trade Idea

  • 6mth expiry – Priced in 10m USD notional
  • Buy KI Put Spread with strikes 128 & 123 with up and in KI barrier 137 for premium cost of circa 54k USD
  • For reference Vanilla equivalent would be circa 104k USD premium cost

Positioning Charts

USDBRL NDO Positioning Data 02/02/2023 - 09/02/2023

Volumes in the week to February 16th was significantly lower than the previous week, and the different size of the bubble highlights the reduced notional and conviction in the market. In the immediate term, there is no upside cover, but call bubbles increase in above 5.25 and then 5.50. Whereas put trades show some concentration around 5-5.10. This suggests consolidation in the immediate term. 

Usd Brl 2 9 (1)

USDBRL NDO Positioning Data 09/02/2023 - 16/02/2023

Usd Brl 9 16 (2)

USDCNY Vanilla Positioning Data 02/02/2023 - 09/02/2023

There remains considerable upside cover in USDCNY, and this increased in the week to February 16th. Options strike prices have shifted higher in the last week as the spot moves higher. There is little downside cover in the near term, and any correction would in the USD could prompt greater demand for downside options towards 6.70. 

Usd Cny 2 9 (1)

USDCNY Vanilla Positioning Data 09/02/2023 - 16/02/2023

Usd Cny 9 16 (2)

USDJPY Vanilla Positioning Data 16/12/2022 - 16/01/2023

There is more upside cover in the month to February 16th as the USD firmed, however there is considerable downside appetite with options traded to 115, and to 103 in 2024. We expect upside for the USD in the near term, but traders look to build longer term short positions with the large volumes of downside puts and expiries later in 2023.

Usd Jpy Dec Jan

USDJPY Vanilla Positioning Data 16/01/2023 - 16/02/2023

Usd Jpy Jan Feb

Charts and Tables

FX Expiries

Expiry (37)

Volatility Grid

Grid (62)

Historical Spot FX Volatility (30D Rolling)

Chart (31)

FX Matrix (today)

Spot (89)

Weekly Change

Week (70)

Key Events & Releases

Calendar (103)

Technical Charts

JP Morgan Global FX Volatility 


The index continued to remain range-bound, as it fluctuated within the 10.17-10.65 range. In recent days, the index broke below the moving averages once again to settle at 10.26. The stochastics are continuing to fall, but momentum is seen waning on the downside as stochastics are oversold. The MACD diff is negative and converging, suggesting we could see some downside to 10.20 before reversing the trend once again. The moving average levels stand at 10.35 and 10.42, respectively, and the index would first need to break above these levels before testing 10.60. Alternatively, appetite below current levels could set the scene for 10.17 and 10.00 in the longer term. We expect some downside in the near term but find support at the lower end of the range.

Dollar Index 


The index jumped higher in recent days, breaking above the resistance of 104 and is now trading firmly at 104.59. The indicators point to a potential change of trend, with stochastics deeply overbought and the MACD positive and diverging, but the upside momentum is waning. To suggest further gains in the near term, the index needs to break above 104.85 and 105, respectively. However, we have seen the candle bodies reduced in size and the upper shadow building around 104.60 level, suggesting that the index might struggle above it in the near term. To confirm the change of trend, the index needs to break below the support of 104 before targeting 50 MA at 103.53. The indicators point to waning momentum on the upside, and we expect the index to struggle above current levels. This could then suggest a change of trend on the downside in the near term.



The pair has gained ground since the start of the month, breaking above the resistance of 134 to settle higher at 134.78. The stochastics have fluctuated in recent days, and the most recent downside convergence could be a sign of a trend change in the near term. The MACD diff is also positive and converging, suggesting waning upside pressures. The indicators point to a softening trend on the upside, as stochastics are slowing in overbought. The next robust level on the upside is at 135.77, and if the pair breaks above it, we could see future gains to 136. However, we expect the pair to struggle above these levels and soften in the near term. On the downside, if 134 is broken, this could suggest further impetus to 50 MA at 132.38. We expect USDJPY to weaken marginally, back to the support trendline in the near term.



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