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Macro and Vol Commentary

We have seen the USDJPY pair gain ground in recent sessions, with a recent dip following the CPI release in the US. Will this trend continue in the coming weeks?

US Economy and the Fed

  • US CPI rose by 0.5% m/m in July, the 6-month low; the year-on-year growth yielded 5.4%
  • While this marks another month of positive growth, it is not strong enough to provide support for earlier tapering of bond purchases.
  • Ongoing challenges surrounding the shortage of materials and shipping bottlenecks are likely to continue to support price growth in the months ahead.
  • On the other hand, some price surges are beginning to ebb as the economy’s reopening begins to slow.
  • Core CPI rose by 0.3% m/m, and by 4.3% y/y, below forecasts
  • Used car costs moderated in July, which significantly downplayed the growth of core CPI performance.
  • The Fed emphasised that inflation is bound to be temporary, but it is still unclear when the supply constraints will ease.
  • The Fed has left the rates and the asset purchasing programme unchanged in the latest meeting; however, it hinted at approaching the decision to taper the purchases sooner than expected.
  • The headwinds, however, prevail, as the path to full economic recovery is still largely dependent on the trajectory of the virus spread.
  • A sharp pick up of infections we have seen in the country could once again weigh heavily on the service industry and soften the inflationary pressures we have been seeing for most of the year.

Japan CB

  • In the latest July meeting, the BOJ kept the monetary policy steady 
  • While some remained worried about the rising inflationary measures, other members warned that slow wage growth could moderate such pressures.
  • The BOJ also said it would help finance climate change projects, adding to the debate whether environmental issues should be part of the central bank’s governing policy.
  • Rising commodity prices across the world have impacted Japan, but the impact is believed to be moderate, according to the BOJ statement.
  • They believe that this rise in prices is only temporary and is expected to have a much smaller impact on Japan in comparison to other Western economies.
  • Japan’s wholesale prices rose by 5.6% in July, a 13-year high as import costs risen sharply, fuelled by rising commodity costs.
  • However, core consumer prices, which BOJ uses as a gauge of inflation, rose by just 0.2%, as weak domestic demand deterred significant price gains.
  • The BOJ believes that inflation will accelerate as we approach the end of the year, supported by higher energy costs, and the base effect of the government campaign that pushed down travel fees in late 2020.
  • The bank will continue with QQE and yield curve control with the aim of price stability of 2%. 
  • The support for firms and financial markets throughout the pandemic will continue, with the upper limits of 12trn yen and 180bn yen for ETS and J-REITs, respectively. 

Both economies have kept the monetary policy unchanged, as the uncertainty surrounding economic recovery prevails. We have seen a rising number of cases in both Japan and the US; however, the former seems to be behind in its vaccination programme, with only a third of the population fully vaccinated. The Olympics helped boost spending in the economy; however, this effect quickly subsided, and the stock markets continued to fall throughout July. Consumer price growth seems to have moderated in both economies; however, the US seems to be much closer to a complete economic recovery, and therefore the pullback of stimulus support. We expect Japanese economic growth to pick up closer to the year-end but remain in the loose monetary policy stance for much longer.

Volatility Commentary

Despite concerns from the Delta Covid Variant FX markets are generally normalising with the main dominating theme in markets being inflation and what action (or inaction) central banks will take in the face of it. As the global economy has opened up USDJPY has generally strengthened and following the latest NFP numbers we saw USD stronger with vols remaining relatively low even with recent Covid states of emergency being declared in Japan. In spite of the Delta Variant disruptions, we expect further normalisation to the market and favour positions benefitting from USDJPY moving further up. 

USDJPY Trade Idea

  • Buy 3 month USDJPY Call 111 strike in 10m USD notional for 83k USD
  • Sell 3 month Put spread with strikes 109 & 107 in 10m USD notional per leg for 39k USD
  • Total structure circa 44k USD cost

Positioning Charts

USDBRL NDO Positioning Data 29/07/2021 - 05/08/2021

USDBRL NDO Positioning Data 05/08/2021 - 12/08/2021

This week we saw fewer options executed, the total range was wider with options traded 4.80-5.70 but options in the near term had a narrower range than the previous week. There is a cluster of put options for expiry in the first week of September and some calls above the market at 5.40-5.50. Outside of these the nationals are a lot smaller and there is little conviction in the market. 

USDCNY Vanilla Positioning Data 29/07/2021 - 05/08/2021

USDCNY Vanilla Positioning Data 05/08/2021 - 12/08/2021

Downside puts continue to dominate the market, the range has shifted significantly in recent months as spot has rallied. There are significantly fewer call options executed in the week to August 12th, suggesting reduced conviction on the upside. The ranges of puts is narrower this week at 6.30-6.50 compared to 6.20-6.50 last week. This could mean a moderate correction to the downside in the near term.  

USDJPY Vanilla Positioning Data 12/06/2021 - 12/07/2021

USDJPY Vanilla Positioning Data 12/07/2021 – 12/08/2021

In the month to August 12th, there were fewer call options traded in USDJPY, and the range of calls due for expiry in the coming weeks was narrower than the previous month. Out to September 11th, call options have a range of 110-113. There are considerably more puts traded in the near term and longer-term, the range was is 110-105. This suggests the market is hedging against risk and that USDJPY will fall.

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 global index continued to decline after testing trend resistance, support at 6.50 is being tested at the time of writing. A break of this level would set the scene for lower prices towards the recent low at 6.39. The MACD diff is negative but is converging suggesting improving sentiment, the stochastics and RSI are rising out of oversold which helps to confirm the outlook of the index pushing higher in the near term. In order to confirm rejection of the descending triangle, the index needs to break above trend resistance and towards 7.10 and 7.50.


The Dollar Index 

The index has weakened in recent sessions after failing into resistance at 93.176. The stochastics are in oversold territory but we could have a buy signal on the horizon. The MACD diff is negative and converging, both of which help to confirm the improving sentiment as the index reaffirms support at the 200 DMA. If prices continue to hold this level we could see the index push higher towards the 50 DMA at 92.7255. In the long run, the index needs to take out 93.176 to confirm the trend. On the downside, to confirm the double top at 93.176, the index needs to take out support at the 200 DMA and then the 38.2% fib level at 91.8433. 



The USDJPY has declined in recent weeks as protracted selling pressure prompted a decline and test of 110. The RSI, stochastics and MACD diff is negative and diverging, outlining the negative sentiment in the market. Continued selling pressure may set the scene for lower prices towards 109 before targeting 1018.70. Superseding this level support stands at 107.48. On the upside, we need to see prices find support around 109 before pushing back towards 110 in the medium term. The 200 DMA is about to cross below 50 DMA which is traditionally bearish. 



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