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Macro and Vol Commentary

In April, we presented that we remained bullish on AUDJPY. However, two months later, is the tide turning?

Australian Economic Data

  • GDP data for Q1 shows that the Australian economy grew at 1.1% y/y and 1.8% q/q. Forecasts suggest that the economy will grow at 4.75% in 2021 before moderating to 3.5% in 2022.
  • The labour market was above pre-pandemic levels in March, with more people employed in March than before the pandemic. The unemployment rate was 5.5% in April; we expect the labour market.
    • We expected unemployment to increase due to the drop-off in the JobKeeper program to outpace demand for new workers; however, demand for workers is robust. The ANZ job advertisements increased 7.9% m/m in May.
    • The employment change in April was down -30,600, from the previous month when the employment change was 70,700.
    • The participation rate was 66% in April, down from 66.3% in March. The wage price index is also improving at 0.6% q/q in Q1, with at 1.5% y/y.
    • Subdued balance sheets with likely limited business investment acting as a headwind to further employment growth
  • Inflation for Australia has been revised higher, with the forecast for 2021 now at 1.5%, before reaching 2% in the coming years.
    • Inflation is currently through higher input prices and raw materials, but this has benefitted the Australian economy due to its substantial iron ore, coal, lithium and nickel.
    • The consumer inflation expectations in May were 3.5%, up from 3.2%.
    • The Melbourne Institute of inflation was 3.3% y/y but was down -0.2% m/m for May.
    • Household spending is improving; retail sales are improving and stand at 1.% in April; we expect this to remain the case as the labour market improving.
    • The upward pressure on wages will help retail sales rise, but this will also inject some inflationary pressure. The strong labour market will also raise consumer confidence leading them to spend savings over the pandemic.
  • The manufacturing PMI has continued to expand, with the May reading at 60.4. Business activity continues to grow in line with new orders, with business looking to hire extra staff to prevent bottlenecks.
    • We do expect input costs to continue to rise, with output charges reaching new highs. There is a significant amount of inventory de-stocking across the supply chain, and in our opinion, there will be delivery delays.
    • Business optimism is positive for the next 12 months.
  • Services and composite PMI are also positive and stand at 58 for May.
  • The housing market is robust; building approvals reached 17.4% in March but declined in April by 8.6%. Private sector houses gained 4.6% in April, up from 0.1% in March.
  • The trade balance expanded in April to A$8,028, with exports increasing 3% m/m and imports declining 3%.
    • Relations with China continue to deteriorate, and this will impact exports if it escalates. Iron ore has not been affected by these tensions. However, we see reduced loading onto vessels destined for China due to port issues in Western Australia.
    • Coal exports increased in April 2021 to $287m, by 8%
    • China was the leading export destination at $591m, 4% with Japan in second place at $297m
      • This was driven by the increase in non-ferrous metals ($116m, up 167%)
    • Total exports reached $35,952 in April, on par with the previous month at $35,940 in May, non-rural goods were $29,971

Monetary Policy

  • Supply chain bottlenecks in conjunction with higher material prices have caused inflation expectations to rise. Inflation has crept towards central bank targets, and this will remain the case in the coming months. However, price pressure is still low in sections of the economy.
  • In July, the committee will decide if they retain April 2024 as the target for 3% or switch to November's next maturity.
  • The recovery needs to be broader before policy is changed, but they did not that the date for final drawings under the TFF is June 30th; banks had drawn down $100bn, but another $100bn was available. The facility provides funding for three years, and therefore it will support low funding costs till 2024.
  • The implied interest rate is -0.292 for September; there is little chance of a rate hike.

AUD Flows

  • Real money flows for the last week were positive for AUD at 2.68, considerably above the 4-week average at -0.45. the 65-day correlation of daily flow vs the currency return stands at 15.4% in for real money
  • Leveraged flow was -0.05 for the week to June 7th, below the 4-week average is 0.06, the 65-day correlation with of daily flow vs the currency return stands at 29.7%
  • Banks and corporates were slightly subdued, with corporates negative for the second straight week at -0.77.

JPY Flows

  • The one-year cumulative correlation flow shows real money at 64.26 to June 7th, but the one-week average flow was slightly more benign at 0.31.
  • Bank 1-week flow was 0.93 and above the four-week average.

Source: Citi Velocity 

AUDJPY has rallied in the last 12 months, but the tailwinds behind Australia are starting to weaken even though the country's economy is still growing and gathering pace. The currency is failing to rally further and struggles to maintain momentum above 85. The Japanese economy shrank by less than expected in Q1 2021, at 3.9%., capital spending and private consumption remain weak, which outlined the weak domestic demand. We hope Japan recover in the coming months, and the Olympics will help the economy even if there is little prospect for tourists. The economy will continue to benefit from the stimulus, and the government have pledged a fiscal reform to improve the economy. As a result, we hold a short term bearish view on AUDJPY and could see AUD slipping slightly. In the medium to long term, we maintain our bullish view on AUD and AUDJPY.

Volatility Commentary

Over the last six months, we’ve seen AUDJPY rise with the situation in Australia improving and JPY weakening across the board as a haven asset with re-opening/vaccine recovery factoring to markets. Alongside the spot move higher we’ve seen also AUDJPY Vols generally creep lower with volatility realising below implied and both spot implied vols being largely unaffected by the recent Coronavirus spikes in Japan. Overall we expect in the short term the Australian economy to improve, AUDJPY to remain relatively stable (with potential for a short term move lower as mentioned above) and vols to continue realising below implied as we go into summer.

AUDJPY 1-month Realised and Implied Volatility 

AUDJPY Trade Idea 

  • Non-directional volatility trade
  • Sell 1 month expiry ATM Straddle for circa 7.15 vols
  • Delta hedge short gamma/vega position
  • Doing so in 10m AUD a leg (20m AUD total) gives circa 24k AUD Vega
  • Trade only suitable for investors with capability to manage and delta hedge short gamma positions

Positioning Charts

USDBRL NDO Positioning Data 25/05/2021 - 01/06/2021

Options for the week to June 8th showed less appetite for the market with expiries in the next week.  There were fewer options traded than the week before, but we did see options with a higher notional value which has expiry before 3rd July, the range of these options is 4.80-5.60. The majority of options executed are puts and there is very little upside cover at all. The market continues to expect weakness in the near term judging by the lack of upside cover. 

USDBRL NDO Positioning Data 01/06/2021 - 08/06/2021

USDCNY Vanilla Positioning Data 25/05/2021 - 01/06/2021

Options volume for USDCNY was lighter in the week to June 8th there is little options cover above 6.50 in the week to June 8th. However, there is also fewer options executed than the previous week. There is more of a concentration around spot in the week to June 8th. There is little upside cover either side of the 6.30-6.50 range even as we move through Q3. We expect the trend in spot to continue. 

USDCNY Vanilla Positioning Data 01/06/2021 - 08/06/2021

AUDJPY Vanilla Positioning Data 08/04/2021 - 08/05/2021

There is no real pattern for AUDJPY, the carry trade does impact the positing as traders look for cover. However, there is bias to the downside, with more puts traded even though the national values are small. The call options have a higher notional value but there is not much activity around spot. Upside cover falls of a cliff after 87, but trades are patchy. We have seen more put options traded around spot but we expect cover to increase as the market falls. 

AUDJPY Vanilla Positioning Data 08/05/2021 - 08/06/2021

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Charts

JP Morgan Global FX Volatility Index 

The index has broken back below trend support and the 6.80 this week. The indicators oversold, with no sign of convergence out of the territory, a break of this level could pave the way for a challenge of 6.60. The MACD diff, however, is negative and converging, suggesting we could see a change of trend in the near term. On the upside, the index needs to gain a footing above 6.80 and then 50 MA at 6.91; this could set the scene for a test of 7.00. The losses have been well bid, and if the index breaches support at 6.60, we could see prices fall in the medium term.

Dollar Index

The dollar index has recovered moderately in recent weeks after finding support at 89.66. However, in recent weeks gains have been lacklustre and failed to break through 90.51. The stochastics are diverging on the upside, with %K in the overbought territory, and the MACD diff is positive and diverging, suggesting we could see further upside momentum in the near term. The pair broke above the 100 MA level at 89.90 but has rejected 200 MA at 90.34, and if prices retreat back to the converged 50 & 100 moving averages at 90.7 and 89.99 and break below these levels, we may see a break of the recent upward trend. On the upside, to confirm further bullish sentiment, the index needs to break 200 DMA and then target 90.51 in the near term.


The pair has been gaining ground in recent weeks, prompting a breach of 100 and 200 MA resistance level at 84.65. However, the market has struggled to break above the 50 MA at 84.76 and so remained range-bound in the last week. The stochastics converged on the upside, and the MACD is about to converge on the upside, a clear buy signal, suggesting that we could see the index break back above the 50 moving average, with an upside target of 84.80 in the near term. On the downside, if support around the moving averages does not hold firm, this could trigger losses back through support of 84.63 and target 84.60. The indicators suggest we could see the pair edge higher in the near term.



This is a marketing communication. The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Please be aware that, where any views have been expressed in this report, the author of this report may have had many, varied views over the past 12 months, including contrary views.

A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

Please contact the author should you require a copy of any previous reports for comparative purposes. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Data in this report has been sourced from Bloomberg unless otherwise stated. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy.

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