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Macro and Vol Commentary

This week we look at USDJPY and see if risk appetite will hinder the Yen’s chance of a rally.

Japanese Data

  • Japanese manufacturing data is still contractionary, June mfg PMI was 40.1, a modest improvement on 38.4 in May
    • Capacity was running low, as orders were weak both domestically and internationally
    • Business has moved into positive territory
    • Manufacturing data has contractionary since April 2019
  • Services and Composite PMIs are also negative at 45 and 40.8 respectively; both readings are better on a sequential basis
  • The majority of Tankan business conditions are negative, outlining the economic conditions in the economy. With cases rising in Tokyo the probability of the economy running at lower capacity for longer is high
  • The outlook for the manufacturing sector is negative, and we expect orders to remain weak in the near term
  • The employment figures for Q2 did improve from Q1:
    • Employment Manufacturing % balance 11% in Q2 up from –15%
    • Non-manufacturing to -17% for Q2, up from -37% in Q1
    • All industries up from -28% in Q1 to -6% in Q2
  • Industrial production fell 25.9% y/y in May to -15% in April
  • Month on month data is improved on a yearly basis, from 9.8% to 8.4% from April to May respectively
  • The unemployment rate has increased from 2.9% in April to 2.6% in May, the job to applicant ratio has also fallen to 1.2 in May
    • The participation rate has remained steady at 61.8%
  • This is likely to keep inflation muted in the near term; firms largely believe inflation will remain weak for 2020. However, Japan has had issues with inflation for a while
  • Retail sales have been lacklustre, falling to 12.3% y/y with department and supermarket sales declining 16.7% y/y
  • Real disposable income has surged, which suggests that some of the government relief has been received, the 100,000 yen paycheck could help boost spending in the near term. However, the savings ratio has increased to 25.90% in April 2020 up from 17.10% to 2020. We expect the rising savings ratio to act as a headwind to consumer spending until there is more certainty surrounding the economy
    • Evidenced by the fall in real household spending -16.20% y/y
  • Machine orders are rising fell significantly in April to -17.7% y/y from -0.7% y/y
  • All industry activity index has declined to 93.5 as of April, and the government have recently indicated that the economy is worsening with the coincident indicator worsening in May to 74.8 from 80.1 in April
    • The leading index, which is forward-looking, did actually improve in May to 79.3
  • Bank lending has also increased in tandem with accommodative credit facilities from the BOJ
  • The Tankan report suggests that small business were unsurprisingly the hardest hit, this suggests that stimulus measures will remain accommodative in the medium term
  • The balance of payments current account is released tomorrow and we are expecting this to widen from the previous month of ¥262.7bn

Bank of Japan

  • Record volumes for the 30yr bond auction suggest an appetite for yields. The Japanese yield curve is expected to remain steep due to the significant asset purchasing scheme
  • We saw the BPJ buy 1.2bn Yen of ETFs in Human and Physical Capex program
  • They also injected 2.7bn Yen via J-REITs
  • The BOJ is encouraging small banks to take up lending facilities, according to the ministry of internal affairs 1trn yen of in assets are eligible for collateral for BOJ lending aren’t being utilised
  • We do not expect a change in policy in the near term, a spike in yields could trigger more buying programs

The Japanese economy continues to struggle; electricity demand remains weak the threat of a second wave is becoming increasingly prevalent. Stimulus from the government and the BOJ continues to be accommodative; this is expected to continue. We look US equities and copper markets and suggest these assets are ‘out of touch’ with the real economy, despite improving data. The strong demand for Japans 30yr yield exemplifies the hunt for yield, and safety. Safe-haven assets remain well bid in the long run, and we expect this to remain the case. Analysis of fund flows suggests Japanese firms are selling domestic assets in favour of foreign assets, which cap losses for USDJPY. We expect the USDJPY to continue to consolidate in the near term, but global uncertainty remains the threat and we believe the Yen will rally in the medium term.

Volatility Commentary

As the global economy shows numerous countries gradually opening up and macro-economic recovery becomes the main theme, we’ve seen macro vols come back a long way from March. In the case of USDJPY, we see it’s trading slightly over pre CV19 levels but not out of the ordinary. We note pre-CV19 volatility in this pair generally realised lower than implied, and we expect to see something similar over the next month or two. Though as we come into the end of the year, we may see slight vol pickups as US President Trump potentially shifts his focus towards China & global trade again to win support for the election which could disrupt an already fragile global trading system. This could see JPY affected as both a having major exports and being a haven currency. We favour positions that benefit from potential USDJPY downward moves (JPY rally) via structures like a calendar spread (see below) being short shorter-date vol against longer-dated vol done to reduce overall USDJPY vol cost and vega exposure given the longer-term tendency of USDJPY vol to realise lower than implied.

USDJPY Trade Idea

- Buy 6-month expiry USDJPY Put in 10 USD with 106.50 strike for circa 178k USD Premium
- Sell 2-month expiry USDJPY Put in 10m USD with 106.50 strike for circa 62K USD Premium to offset the cost of 6-month long option
- Overall cost is circa 116k USD up front premium

Charts and Tables

Technical Charts 

JP Morgan Global FX Volatility

The index has consolidated in recent sessions, holding above support at 7.63. The stochastics are rising and the MACD diff is positive which could suggest higher prices in the near term through MMRetr and 50 DMA. To grain conviction on the upside, the index needs to take out-trend resistance around 8.50. The index has repeatedly failed into this level in recent weeks. On the downside, a break of immediate support at 7.63 would set the scene for lower prices through 7 towards 6.80. The longer-term trend is on the downside but we expect futures to remain the case however, the descending triangle is still intact and if futures take out support this would help confirm the outlook of lower prices.

Dollar Index 

The dollar index has struggled to break back above the moving averages, failing to confirm the positive stochastics. The MACD diff is also positive and this gains through the moving averages which have converged. The hammer candle and downside tail suggest an appetite for prices but prices remain below key resistance. The 200 DMA is closing in and we expect this to provide robust resistance in the near term, a breach of this level on the upside would help the index regain upside conviction. On the downside, rejection of prices around the 50 DMA could trigger losses through support at 96.604 towards 96.431. The key level on the downside is the recent low around 95.64. We anticipate prices to remain rangebound in the immediate term but repeated failure on the upside keeps impetus on the downside.


The pair has consolidated in recent sessions after failing above 108, the stochastics are suggesting higher prices. The MACD lacks conviction, but in order to regain upside, conviction prices need to take root above 108. In the immediate term, prices need to hold above the 200 DMA and then target the 108. In the long term, the symmetrical triangle going back to march is still intact and the resistance line needs to be broken in indicating a breakout. On the downside, rejection of trend resistance and the rejection of 108 could suggest waning appetite for higher prices. To suggest a move lower, prices need to break below the 100 DMA and then trend support.



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