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Sterlingyen

GBPJPY: BOJ MISS; BOE HIT? MORE SELLING ON THE HORIZONBOJ Miss: 1. BOJ deliver one of the biggest misses in history (vs expectations/ pressure) - only increasing ETF purchases and dollar funding by apprx $60bn annual in total vs 10-20bps of Depo and LSP cuts + 5-20trn in QE increase + ETF increase. *See attached post for in-depth detail on the BOJ situation and price action history/ Yen strength/ Safe havens* BOJ Miss Compounded with a BOE Hit: 1. BOE are expected to ease by 25bps and possibly add 50bn to their QE programme on Thursday - a BOJ miss combined with a BOJ hit should cause compounded losses for GBPJPY as there are two drivers - Yen should continue this week to get stronger (as BOJ easing expectations surpass and Yen strength increases) whilst GBP gets weaker as the BOE on Thursday likely takes action, reducing the value of Sterling - with both providing the optimal environment for downside. - Historically, when BOJ has delivered new policy/ missed GBPJPY has sold off aggressively between 2-8days and 700-1200pips. Now whilst I dont expect the same level of aggression in the near-term as the relative value is much lower now (135 vs 175) so moves lower should be smaller - I do expect that 400pips lower on the day is not the end of the selling rally for GBPJPY. - Initially at the start of the week i expect GBPJPY to move lower at least another day (satisfying historical moves), perhaps into the 133.5 level which would be 550pips, lower than the smallest sell-off but fair given the relative value changes - not that i would be surprised to see more. - Later into the week is when I expect the bulk of GBPJPY losses to come (e.g. Thurs/ Fri) - the reason for this is as 1) any Yen downside risk from the MOF releasing upside in the details of their stimulus package would have surpassed e.g. increased stimulus from 28trn-40trn (unlikely) or increased govt spending section - both of which devaluing yen moving gbpjpy potentially higher. Though I think the risks are more skewed to MOF delivering a package that strengthens JPY as it undershoots expectations as several MOF members have mentioned the package being over several years - the more years the less punch the package has (given some expected it (5% of gdp) to be spent in 1yr), equally the less direct govt spending portion of the package will also lessen the depreciative impact on yen (rumoured to be 13trn, if less then Yen could get considerably stronger). As mentioned I see the MOF release to be asymmetrically skewed to expectation downside for these reasons. 2) BOE GBP selling pressure would happen when they cut the rate and adjust their QE programme - this is a highly likely scenario as BOE MPC Minutes in July said "Most members expect to loosen policy in August" and recently the BOE's biggest hawk M. Weale switched stance in light of UK Business PMI/ Optimism prints at 10yr lows saying the BOE needs to act fast/ delaying policy further doesn't make sense. Trading strategy: Sell GBPJPY @mrkt 133.5TP1 130.5TP2 128.5TP3 - risk averse traders could wait for the 50-60% MOF/ general Vol bounce into 136-38 level before shorting - I would reshort here anyway.
Short
by QuantumLogicTrading
11
USDJPY/ GBPJPY: BUY $YEN IF DATA MISSES; SELL £YEN IF DATA HITSThe Risky BOJ front run trade using CPI inferences - I find it very interesting that the BOJ is releasing ALL of its key economic data (minus GDP) before making the easing decision, especially as we have already had CPI data this month so we will have an 2 CPI releases in one month which ive never seen happen before (CPI from JPY is usually due next week). - This to me indicates strongly that 1) All of the data released e.g. CPI, employment, retail sales, industrial production has some weighting on the BOJ decision and 2) that CPI especially has perhaps the strongest weighting on the BOJ decision as they are releasing 2 CPI prints in one month which means they brought forward the measurement by a week - this means they value the CPI print strongly. - Therefore, knowing this, in an ideal world either 1) ALL of the data will contract, which puts more pressure on a big BOJ easing package or 2) ALL of the data improves which eases the the pressure on the BOJ package - thus from here we are then able to take risk with an "educated" guess of what the policy will tend to be i.e. big or smaller. Long USDJPY if CPI less than -0.4% and generally weak/ miss other data: 1. The rationale is that a lower than expected and last print shows the JPY economy is decelerating even more aggressively than in previous months and therefore the BOJ will me MORE inclinded to ease heavier, as the data suggests there is a bigger problem. - Obviously the data/ CPI print imo acts as a function of BOJ easing, if we get massive misses across the slew of data then we should expect a bigger easing package than if there is only a slight miss - therefore we should treat our trades the same way. 2. Long USDJPY by xlots depending on the serverity of the data miss e.g. if CPI was -1.0% and unemployment ticked up to 3.4% i would do 3lots long usdjpy. If it was -0.5% and 3.3% i would do 1lot for example. Short GBPJPY if CPI is greater than -0.4% and other data generally hits/ is positive 1. The rationale is the opposite of the above - we assume if data improves that the BOJ will be less inclined to do a big easing package so we expect yen to remain strong so we go long yen and short GBP. - Once again the lot size is a function of the serverity of the data e.g. if CPI turned positive to 0.1% and unemployment dropped to 3% we would short 3lots. vs only 1lot if CPI ticked up only 10bps from last and unemployment ticked down only 10bps. Risks to the view: 1. The First risk is that data in general is considered to have "underlying trends" so the fact one print is outstandingly bad/ good might NOT impact policy e.g. thin about US NFP that was less than 100k and shocked markets - but it was a one off so didnt make the FOMC cut rates back. 3. Data underlying trends thus can reduce the weighting this data is given e.g. even if CPI improved to 0.1% from -0.4%, the BOJ could argue this is a one off print as the underlying trend for the past 6m+ has been negative inflation thus they will go ahead with a big easing package. - HOWEVER , the above point "3" in mind i believe data to the downside will be given a greater weighting than data to the upside, so we should have a short yen bias as weak data has been the underlying trend for most data points (especially CPI). -Further, i also think tail-end/ RHS/ LHS results will be given a proportionately larger weighting in their decision so this should also be reflected in our trading e.g. if CPI was -2% from -0.4% i would be a much much more aggressive buyer of UJ than if a -0.5% print from -0.4% is seen. The same can be said to the topside, if i saw +1.5% inflation from -0.4% last i would be a much greater seller of GBPJPY than if i saw -0.3% CPI from -0.4%.
by QuantumLogicTrading
3
BOJ: JPY V USD, EUR, GBP - WHAT THE OPTION MARKET IS TELLING US50 Delta ATM Volatilities: USDJPY - - $Yen has an ATM implied volatility curve of 55.95%mrkt 24.08%1wk 18.31%2wk 14.12%1m - Obviously we are aggressively steeper in the front end, with BOJ tomorrow and JPY MOF Fiscal Package details coming next week providing heightened vol for the 1day and 1wk vols - naturally we then see the curve tail off as the event vol fades. GBPJPY - - £Yen has an ATM implied volatility curve of 58.66%mrkt 25.93%1wk 23.02%2wk 18.30%1m - The same can be said about sterling yens ATM curve, adding that it is steeper accross the tenors as the recently heightened GBP risk/ BOE event vol is priced into the 1wks and 2wks greater relatively vs $yen, with 1ms also outperforming $Yen as the perceived GBP risk/ vol post-brexit carries higher vs the USD. EURJPY - - EUROYEN has an ATM implied volatility curve of 49.42%mrkt 22.82%1wk 18.03%2wk 14.23%1m - EUROYEN mirrors $yen from 1wk-1m as the term structure is very similar for eur vs usd (no significant event vol expected). Though we see a notable 6-7vol divergence in the current vol which is expected as $Yen expressions are favourable for BOJ out-performance positionings (USD a firmer based/ more widely traded) and £Yen are favourable for BOJ under-performance structures as BOE next week compunds the attractiveness in the downside of the cross (BOE likely to ease) which in turn increases the demand for £Yen expression on a BOJ no-show. 25Delta Risk Reversals (25d call vol minus 25d put vol - examines the relative demand) USDJPY - - $Yen RRs are +3 mrkt, +0.62 1wk, -0.67 2wk, -0.81m - Interestingly we are seeing a moderate $Yen topside coverage in the front end (e.g. current and 1wks) implying the market is hedging/ positioning for a BOJ Out-performance Surprise (call demand > Put). The RRs are quite small at +1 so i wouldnt say there is a huge consensus on BOJ HIT expectations. Nonetheless calls are likely being purchased to hedge underlying spot short positions in the near term as any $yen/ BOJ topside is expected to not last long and be faded aggressively - which explains the switch to negative RRs after the BOJ/ MOF events have passed. GBPJPY - - £Yen RRs are -6 mrkt, -3 1wk, -1.3 2wk, -2.2 1m - Understandably SterlingYen has a different RR structure as BOJ and BOE predispositions are priced into option structures, rather than just BOJ (as is the case for £yen and euroyen) - so we see a strong put bias, particularly in the front end (current and 1wks) as these cover the BOE and BOJ event vol. Unlike $Yen we see there is a clear trend for BOJ miss/ downside speculation as it is the logical chosen proxy, as a BOJ miss is highly likely to then be compounded over the current and 1wk terms as BOE hit expectations are priced in, accelerating the GBPJPY to the downside and RRs towards the LHS (BOJ miss = yen strength, BOE hit = Streling weakness - aggressive downside). Also put gbpjpy, automatically hedges any BOJ hit/topside risk as 1wk later the BOE is likely to ease so any yen downside arising from a BOJ hit will likely be smoothed somewhat by BOE easing induced GBP selling; thus lessening the negative impact or even turning the position back into the money.
by QuantumLogicTrading
6