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FX Options Weekly

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Macro and Vol Commentary

For the last three months, USDJPY strengthened significantly, breaking above 2016 highs to reach 115. However, the pair sold off more recently, driven primarily by dollar weakness. We look at a macroeconomic picture to understand the fundamental drivers behind the pair and project our outlook.

  • Japan contracted by 3.6% y/y in Q3 2021 as private consumption, which makes up more than half of GDP, declined due to the imposing of lockdown restrictions.
  • The Q4 growth, however, is expected to rebound, as lockdown restrictions were lifted and consumers returned to their spending habits
    • Retail sales grew for the third consecutive month in November, up by 1.2% m/m
  • This trend is likely to slow once again in January, as the spread of omicron caused
  • Likewise, Japan’s trade performed at a record rate in December
    • Exports grew by 17.5% y/y
      • The key drivers behind the rise were automobiles, steel and chips, but the growth moderated somewhat as supply chain bottlenecks continued to add further pressure on producers.
    • Imports grew by 41.1 y/y
  • Trade, in line with domestic performance, will most likely slow in January, as the omicron wave has swept the country once again
    • While we are likely to see some deceleration, we do not expect this to have as strong of an impact as the lockdown measures had in the previous waves.
      • At the time of writing, the government has only implemented quasi-emergency measures and should only involve 13 prefectures.
        • So, the impact of lockdowns while a headwind to exports should not reach the lows seen during the delta spread, and the measures will be hitting the hospitality and not manufacturing as of now.
  • Rising inflationary pressures are a concern globally, however, Japan seems to be on a better path to avoid the outbreak seen in other major economies
    • In December, gains in CPI failed to accelerate towards the BOJ target, growing by 0.5% y/y, well below the government’s target of 2%, with household items offsetting the strength coming from energy.
      • These base effects are likely to persist, keeping a lid on inflation in Q1
    • The PPI, however, was at 8.5% y/y
      • Most companies, haunted by memories of past deflation, are hesitant to pass rising costs to consumers out of the fear of losing them.
        • This should continue to squeeze their profits, damping the investment and slowing the recovery.
    • This is likely to cool whatever expectations the markets had about the policy changes in the near term.

The Bank of Japan

  • The Governor stated once again that the phasing out of stimulus is nowhere near the horizon
    • First inflation of 2% has to be reached before any possible changes.
    • According to his statement, both long- and short-term policy rates are to remain at the current low levels or fall even lower.
    • He has also stated that no changes will be made until the end of his term, which is in April, and the markets should have already priced it in
  • The government has kept its monthly assessment unchanged in January, sticking to the view that a recovery is continuing despite the omicron-driven wave taking over the country
    • More so, it has raised its outlook on industrial production, citing signs of improvement in the factory sector

Dollar Weakness

  • While beginning the year on the front foot, the dollar has struggled for most of January, falling from 96 even as US Treasury yields surged higher and the faster hiking is expected from the Fed
  • We have seen a pull away from US assets after the inflation reading in mid-January
    • The markets have already priced in multiple rate hikes to take place this year, and December’s inflation reading confirmed market expectations.
    • The investors have now shifted their focus away from the US, and we do not expect a strong longer-term demand until the Fed begins its hiking cycle.
    • The next policymakers meeting is scheduled this week and is expected to confirm the timing of the next cut
      • If the hawkish rhetoric is further exemplified, we expect the pair to find support at current levels in the short term before the longer-term fundamental weakness kicks in once again.

The pair has breached support of 114 more recently, after Japan’s inflation reading. Most notably, the divergence between the BOJ stance and the rest of the world is driving the yen weakness, as investors move money into higher-yielding assets. Fundamentally, Japan’s inflation, albeit growing, is relatively low compared to other major economies. This, further coupled with the BOJ strong rhetoric of no policy change in the near term, is likely to drive yen weakness further. We expect this pair to be more dollar-driven in our short-term outlook, which should remain on the back foot before the Fed meeting this week, driving market expectations about monetary policy outlook. Indeed, the recent decline has been driven by choppy market performance, as well as cloudy market outlook, and if the markets continue to behave that way, the yen might be well bid. 

Volatility Commentary

Following the initial winter fears and vol spike from the Omicron variant USDJPY vols in December came off with vol realising lower than implied in December, though with Fed rate hike expectations shifting, US-Russia tensions over Ukraine and risk-off moves in stocks we’ve seen FX vols such as USDJPY creeping back up. As per the above, we’re expecting a medium-longer term move down in the USDJPY spot and with potentially volatile events around Fed Rate hikes and US-Russia tensions spilling over into military action and natural gas prices, we favour slight long vol/gamma positions. Below we suggest a trade idea buying vol/gamma that benefits from USDJPY spot moves down with features to reduce upfront premium cost in comparison to single simple vanilla.

USDJPY 1-month Implied and Realised Volatility

USDJPY Trade Idea 

  • Buy 3-month USDJPY EKI Put option with strike 113 and EKI Barrier 110 for circa 72k USD (for reference vanilla equivalent would be circa 97k USD)
  • Sell 3-month USDJPY Put option with strike 108 for circa 20k USD
  • Overall strategy upfront premium cost circa 52k USD

Positioning Charts

USDBRL NDO Positioning Data 10/01/2022 - 17/01/2022

The options market saw more volume in the week to January 24th, but the majority of the increase to expire in October, with mostly large notional puts. The range of puts was relatively wide between 5.00-6.00 but the notional values closer to February expiry are mostly small. There is one upside call that is due to expire in April with a strike at 6.25. The positioning in the near term suggests increasing downside momentum, with the number of puts increasing to expire both in the short and longer-term.

USDBRL NDO Positioning Data 17/01/2022 - 24/01/2022

USDCNY Vanilla Positioning Data 10/01/2022 - 17/01/2022

Downside puts continue to dominate the market, with the number increasing in the week ending January 24th; the range however remained the same despite the decline spot price we have seen in January. The number of puts to expire in mid-February has increased significantly, meanwhile, the range of calls has narrowed this week, with a big cluster at 6.40-6.50. This could mean a growing sentiment on the downside in the near term.

USDCNY Vanilla Positioning Data 17/01/2022 - 24/01/2022

USDJPY Vanilla Positioning Data 24/11/2021 - 24/12/2021

Options executed in the month to January 24th, are more concentrated than the previous month, with the range tightening into 100-125 and there is now more downside bias, with many puts being executed in the next couple of months. The number of call options reduced and the upper range has fallen to 125. Options executed continue to cluster around 115 but option volumes are bigger. We expect the market to trend lower in the near term.

USDJPY Vanilla Positioning Data 24/12/2021 - 24/01/2022

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Analysis

JP Morgan Global FX Volatility 

The index has gained ground in the last couple of days after finding support at 7.15. The stochastics have converged on the upside in the overbought, however, it does not look sustainable, as the %K is seen tailing off. The MACD diff is positive and converging. The index broke above both 50 and 100 MA at 7.242 and 7.3014, respectively, but found resistance just above the 200 MA at 7.528. This is further confirmed by equal but opposite candles we have seen today, as the markets have rejected the index above 7.40. If the 200 MA is broken above, this could trigger gains through 7.50 to 7.68. Conversely, a break back below 100 and 50 MA support levels could trigger softness back towards 7.15. The recent candle formation and the indicators point to downside pressures in the near term.

Dollar Index 

The index has rallied in the last couple of weeks, breaking above resistance 96.00, keeping momentum on the front foot. The stochastics continue to edge higher, with %K/%D converging on the upside in the overbought, suggesting the bullish sentiment has been strong. The MACD is positive and diverging on the upside. The pair broke above moving averages of 50, 100, and more recently 200 at 95.96, a strong bullish signal. To confirm the outlook for further price increase, the index needs to break above the longer-term resistance of 96.38 before 96.50. On the downside, the index needs to break below the 200 MA support before 100 MA at 95.70. The gains have been well bid, and the bullish engulfing pattern today confirms the continuation of ascending triangle. The indicators point to the dollar being overbought; we expect the strength of gains to subside before a change of trend in the near term.


The pair began to gain ground in recent sessions but struggled to break above resistance at 50 MA at 114.15. The pair has formed support at 113.47, creating a double bottom formation. The stochastics are rising, with %K/%D edging towards the overbought, and the MACD diff is positive and diverging, suggesting further upside pressures. The reaffirmation of resistance at 50 MA could trigger a break below 113.65 back towards 113.50. Appetite for prices below this level would signal strong selling pressures. However, if near term resistance does not hold, we could see the pair gain back above 200 MA at 114.53 before 100 MA at 114.83. The moving averages are falling, creating a tight range for the pair to trade in. The gains have been well bid, outlined by the length of bullish candles, however, to confirm the indicators, the pair needs to gain momentum above 50 MA to confirm the outlook.



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.

This report is not subject to any prohibition on dealing ahead of the dissemination of investment research. Accordingly, the information may have been acted upon by us for our own purposes and has not been procured for the exclusive benefit of customers. Sucden Financial believes that the information contained within this report is already in the public domain. Private customers should not invest in these products unless they are satisfied that the products are suitable for them and they have sought professional advice. Please read our full risk warnings and disclaimers.

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