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Macro and Vol Commentary

With global headwinds mounting, what do we expect for the USDJPY?

Economic Data

  • GDP in Japan edged higher in Q2 to 0.5% Q/Q; the annualised rate is at 1.9% Q/Q.
    • Private consumption increased by 0.9% Q/Q, but business spending grew at 2.3% Q/Q, up from -1.3% Q/Q in Q1.
    • Business spending usually peaks in Q4, and we expect this to remain the case in 2021, improving the GDP outlook.
    • Private consumption and consumer spending will not grow so fast, which could cap medium- to long-term growth.
    • Net exports contribution as a percentage of GDP was -0.3% Q/Q, and inventory contribution was -0.3% Q/Q.
  • Household spending has improved and stands at 0.7% Y/Y for July, significantly below forecasts of 2.4% Y/Y growth but above the previous month of -5.1% Y/Y.
  • Real cash earnings were also positive at 0.7% Y/Y in July, up from -0.4% Y/Y in July.
  • Labour cash earnings have grown as well at 1% Y/Y
  • The jobless rate in Japan has fallen to 2.8% from 2.9%, but the job to applicant ratio is 1.15; it increased from 1.13 in June.
    • The output gap continues to improve as the labour market strengthens and capacity utilisation also enhances. The latter grew at 6.2% M/M in June, up from -6.8% in May Y/Y, but this declined sharply in July to 3.6% Y/Y
  • Industrial production was -1.5% M/M in July, a significant decrease from 6.5% M/M in the previous month. The industrial production on a year-on-year basis showed growth of 11.6% in July, down from the last month
    • The reduction in industrial production came from the auto sector, where car production was lower due to a spike in COVID-19 cases, supply chain disruptions, and lockdowns in Asia.
    • We expect data to show this in August and September, the Ministry of Economic, Trade and Industry (METI).
    • Factory orders have suffered as a result, and there is a risk to output going into year-end.
  • Manufacturing PMIs are still expansionary 52.7 for August, with July output at 52.4. This was the 7th straight month. However, new orders and output growth rates slowed.
    • Exports declined for the 1st time in seven months, but we continue to see output prices rise even though input prices are eased marginally.
    • Business confidence for the next 12 months was weak, which helps confirm the dark clouds and macro headwinds.
  • Trade data for Japan indicates a balance of -¥635.4bn, the adjusted rate was -¥271.8bn, below expectations of ¥108.7bn.
    • Imports rose and reached 44.7% Y/Y in August, up from 28.5% Y/Y in July. While these figures are strong, it is worth factoring in where the economy was a year ago.
    • Increasing imports indicates stronger consumer spending, but export growth was down in August to 26.2% Y/Y, from 37% Y/Y the month prior.

Bank of Japan

  • Inflation is not something Japan has to worry about, and CPI Y/Y was -0.4% in August, with CPI excluding food at 0.0% Y/Y in the same period.
  • BOJ President Kuroda has admitted it is unlikely the 2% inflation target will be hit within his final tenure.
  • We expect the BOJ to maintain their current policy as the recovery is stagnating.
  • The short term target interest rate will remain at -0.1%, and the 10yr bond yields at 0%.

The U.S. and Japan are at very different points on the economic curve; Japan's recovery has stalled due to higher COVID-19 cases and supply-chain bottlenecks. However, inflation in Japan is non-existent; as a result, the BOJ kept their policy stable. The Fed highlighted they will taper asset purchases maybe as early as next month, but the interest rate hike could also be sooner than expectations. The macro headwinds have been building, and the situation regarding Evergrande in China is causing a worry to investors. We expect any softness in China to have ripple effects across the globe, and this has helped JPY rally against the dollar in recent sessions, despite USD's strength against a basket of majors. We remain neutral on the USD for the remainder of the year but hold a bullish view on the currency in 2022. Recently, risk aversion has caused the dollar to be bid and judged by the Japanese economy's fundamentals; we favour holding USDJPY and buying dips below 109 if it gets there.

Volatility Commentary

Over the year with continuously heavy-handed Central Bank policy we’ve seen vols generally realising lower than implied over the summer. As mentioned above we see a divergence in the monetary policies of the BoJ and Fed with the BoJ likely maintaining current monetary policy and the Fed last night showing the Fed likely to begin taper later this year. With the macro economy still gradually returning to usual and with a BoJ likely to continue the current monetary policy we see the potential for USDJPY vols to continue realising slightly lower than implied and favour positions that benefit from USDJPY spot moves up.

USDJPY 1-month Implied and Realised Volatility 

USDJPY Trade Idea

  • Buy USDJPY 3 month call spread in 10m USD notional a leg with strikes 110.00 & 112.00 cost circa 65k USD

Positioning Charts

USDBRL NDO Positioning Data 08/09/2021 - 15/09/2021

In the week to September 22nd, there were more call options executed as the market turned bullish on USDBRL, this is due to issues we outlined last week. The majority of trading was in a similar range but there is very little downside cover in the options market at the moment. Calls range from 5.30-5.60 but the majority of put options traded are in a 5.10-5.30 range. With the Fed this week and Brazil fighting inflation, we expect more upside cover in the near term. 

USDBRL NDO Positioning Data 15/09/2021 - 22/09/2021

USDCNY Vanilla Positioning Data 08/09/2021 - 15/09/2021

The spot price has remained relatively unchanged the last week but there has been more upside exposure bought in the options market with the range of call option strike prices at 5.48-7. In the first chart, we see that the majority of call options has a strike of 6.45-6.75. In chart 2 the volumes of options increased and so did the notional values suggesting greater conviction in the market. 

USDCNY Vanilla Positioning Data 15/09/2021 - 22/09/2021

USDJPY Vanilla Positioning Data 22/07/2021 - 22/08/2021

The change in options trading over the last month in USDJPY is exemplified by less call options traded in a narrower range. As we look at October 2021 there are more put options than calls which indicates that at the moment the market expects prices to fall, put options have larger notional values than calls and the range gets wider. The uncertainty in the macro-environment could prompt JPY to make gains and the options market suggests we could see spot fall.

USDJPY Vanilla Positioning Data 22/08/2021 - 22/09/2021

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 held above the trend support this week, keeping momentum on the front foot and breaching the MA resistance levels once again. However, the index struggled above the trend resistance at 6.93. The stochastics are falling out of the overbought, and the MACD is negative and diverging on the downside. To confirm the outlook of lower prices, the index needs to break below the moving averages and then support at 6.40. On the upside, if the index can breach 6.91 and then target 7.00, we could see a change of momentum to the upside. The index fluctuated within the downward channel in the last couple of months, and we expect this momentum to continue in the near term, the index should continue to soften. 

The Dollar Index 

The dollar index has been gaining in the recent sessions, we saw a bullish engulfing pattern take place yesterday, however, trend resistance at 93.52 has proved to be strong, and the index edged lower to 93.19. The bearish candles have traded a narrower range than recent gains, suggesting there is an appetite for higher prices above 93.40. The stochastics have converged on the downside, confirming a strong selling pressure, and the MACD is negative and diverging. If weakness prevails, we could see prices break below the 93.17 level to test 50 MA level at 92.94. However, this level has been robust in the last couple of weeks, and we could see prices find support at that level and continue to follow the upward trend. On the upside, if support above 93.17 holds firm, this could trigger gains through 93.40 and target 93.60. The most recent indicators suggest we could see the index decline in the near term, but the index needs to breach the near term support to confirm this.


The pair has gained ground in the last couple of days, breaching the MA resistance levels to trade at 109.96. The stochastics are edging higher into the overbought but are now seen converging; the MACD is positive and tailing off, signalling a change of momentum in the near term. The candle formation confirms this, as the bullish candle bodies got shorter, struggling to break above the resistance level at 38.2% fib level at 110. If this level holds firm, we could see the pair edge lower through the MA levels to 109.50, and consequently, the 109.21 level. On the upside, if the futures break above the near term resistance, it could trigger gains to 110.16 and 110.44 – September highs. The indicators and the double top formation points to a change of momentum in the near term, and we expect the pair to weaken. 



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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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