DYNAMIC STRADDLE: USDJPY & GBPJPY - TP FROM BOJ & FOMC EVENT VOL
The best Idea to play BOJ and FOMC from a risk-averse perspective is to own both in a Long Straddle
Strategy
Dynamic Straddle: Long USDJPY & Short GBPJPY - TP from volatility & Event likely hoods
TP levels = cannot be greedy else you may miss one trades exit point so <25 pips when it goes in your direction for each - total TP = 50pips as 2*25pips
Reasoning
- Traditional Straddle involves would be long and short the SAME cross..
- However i suggest we long USDJPY as UJ has proportionately MORE upside possibility:
1. FOMC is likely to be neutral-Hawkish, this will help UJ trade flat/ higher = Supports long -
- *FOMC PARADOX* important to note that in this sensitive risk-off market if the FED is too hawkish/ hikes it can cause a UJ sell off, as higher rates means greater economic/ market uncertainty as liquidity and financing becomes tighter (despite rate hiking usually making USD trade higher through increased $ deposit demand for higher rates)
2. BOJ is likely to be dovish, this will help UJ to trade higher (especially in this risk averse market - easing helps calm mrkts) = supports long
3. USDJPY ISNT directly impacted by BREXIT fears as GBPJPY as USD and JPY can be considered safety assets, this helps USDJPY trade higher = supports long
So we have 3/3 for long USDJPY.
- Now to hedge this trade AND benefit from possible downside,
we SHORT GBPJPY as GJ has proportionately MORE downside possibility.
1. FOMC neutral-hawkish, drives risk-off momentum (higher rates reduces market liquidity and undermines economic growth thus increasing uncertainty) which drives demand for Yen/JPY, increased demand for JPY supports short GBPJPY
2. BOJ being dovish/ easing potentially helps JPY sell off - however, GBPJPY will be the least sensitive of JPY seller of the JPY crosses, as GBPJPY is the perfect play for Brexit and risk-off, hence in the long run JPY selling wont last long in GBPJPY as once JPY is cheap, buyers will enter to continue hedging/ speculating on brexit with the favourite pair, poor potential/ long run JPY sell side = supports gbpjpy short
3. GBPJPY is directly impacted by Brexit uncertainty in two ways. 1) as investors wish to sell GBP as the uncertainty is only negative for GBP (especially when polls are at 55%). 2) as Investors wish to buy JPY for their "safe haven" asset play. UJ only has the JPY buying to push it lower, which is limited/ offset further as USD buying can also be considered a "safe haven asset) = Supports short GBPJPY
We have 3/3 for short GBPJPY
Evaluation.
- We have 3 points supporting both LONG UJ and SHORT GJ - AND by playing this trade we are able to gain from ALL eventualities, we dont have to guess the BOJ or FOMC outcomes since we have a LONG and a SHORT we have covered ALL eventualities.
- Also from a vol perspective, GBPJPY risk reversals continue to become negative by a significant amount 1wks lost 0.6 to -2.1 (from -1.5), so investors continue to demand GBPJPY downside puts for speculation/ hedging - supporting the short.
- USDJPY ATM volatility, sold off significantly with 1wks losing 3.55 to 12.45 - lower vol in UJ supports buying.
*Any questions on why i think FOMC will be neutral-Hawkish or why BOJ will be dovish-easing please ask in the comments*
Strategy
Dynamic Straddle: Long USDJPY & Short GBPJPY - TP from volatility & Event likely hoods
TP levels = cannot be greedy else you may miss one trades exit point so <25 pips when it goes in your direction for each - total TP = 50pips as 2*25pips
Reasoning
- Traditional Straddle involves would be long and short the SAME cross..
- However i suggest we long USDJPY as UJ has proportionately MORE upside possibility:
1. FOMC is likely to be neutral-Hawkish, this will help UJ trade flat/ higher = Supports long -
- *FOMC PARADOX* important to note that in this sensitive risk-off market if the FED is too hawkish/ hikes it can cause a UJ sell off, as higher rates means greater economic/ market uncertainty as liquidity and financing becomes tighter (despite rate hiking usually making USD trade higher through increased $ deposit demand for higher rates)
2. BOJ is likely to be dovish, this will help UJ to trade higher (especially in this risk averse market - easing helps calm mrkts) = supports long
3. USDJPY ISNT directly impacted by BREXIT fears as GBPJPY as USD and JPY can be considered safety assets, this helps USDJPY trade higher = supports long
So we have 3/3 for long USDJPY.
- Now to hedge this trade AND benefit from possible downside,
we SHORT GBPJPY as GJ has proportionately MORE downside possibility.
1. FOMC neutral-hawkish, drives risk-off momentum (higher rates reduces market liquidity and undermines economic growth thus increasing uncertainty) which drives demand for Yen/JPY, increased demand for JPY supports short GBPJPY
2. BOJ being dovish/ easing potentially helps JPY sell off - however, GBPJPY will be the least sensitive of JPY seller of the JPY crosses, as GBPJPY is the perfect play for Brexit and risk-off, hence in the long run JPY selling wont last long in GBPJPY as once JPY is cheap, buyers will enter to continue hedging/ speculating on brexit with the favourite pair, poor potential/ long run JPY sell side = supports gbpjpy short
3. GBPJPY is directly impacted by Brexit uncertainty in two ways. 1) as investors wish to sell GBP as the uncertainty is only negative for GBP (especially when polls are at 55%). 2) as Investors wish to buy JPY for their "safe haven" asset play. UJ only has the JPY buying to push it lower, which is limited/ offset further as USD buying can also be considered a "safe haven asset) = Supports short GBPJPY
We have 3/3 for short GBPJPY
Evaluation.
- We have 3 points supporting both LONG UJ and SHORT GJ - AND by playing this trade we are able to gain from ALL eventualities, we dont have to guess the BOJ or FOMC outcomes since we have a LONG and a SHORT we have covered ALL eventualities.
- Also from a vol perspective, GBPJPY risk reversals continue to become negative by a significant amount 1wks lost 0.6 to -2.1 (from -1.5), so investors continue to demand GBPJPY downside puts for speculation/ hedging - supporting the short.
- USDJPY ATM volatility, sold off significantly with 1wks losing 3.55 to 12.45 - lower vol in UJ supports buying.
*Any questions on why i think FOMC will be neutral-Hawkish or why BOJ will be dovish-easing please ask in the comments*
