FX:USDJPY   U.S. Dollar / Japanese Yen
50 Delta ATM Volatilities:


- $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.


- £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.


- 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)


- $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.


- £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.
Comment: EURJPY -

- EUROYEN RRs are -10 mrkt, -0.6 1wk, -0.85 2wk, -1.1 1m.

- EUROYEN mirrors $yen in the back-end of the curve (e.g. 2wk/ 1m) as the consensus remains that any Yen weakness is expected to fade shortly (supporting put/ short EURYEN). Though in the front even EURYEN is more similar to GBPYEN - this is because euryen is seen as the 2nd best proxy trade for a BOJ miss/ Yen strength given EURs relative weakness vs the USD (USD policy much more hawkish etc). Thus this materialises in excessive demand for euryen puts over calls for the BOJ meeting tomorrow, and marginally more for the 1wks at -0.6 - though the current to 1wk RR fades aggressively (from -10 to -0.6) as the BOJ event vol elapses today and then from here GBPJPY puts are preferred for the 1wks due to the BOE event making GBP vol more attractive than EUR.
Comment: Summary:

1. As expected the option market supports that short GBPJPY is by far the consensus BOJ miss proxy trade - thus i continue my view of short GBPJPY on any average BOJ delivery (10bps to depo and LSP and 10trn JGBs).

2. USDJPY long for any BOJ hit/ Topside is also supported, but by less than I had expected (I expected to see +3-5 which is a clear topside bias for the 1day option RRs vs the +1 we see). The reason this is lagging could be as investors percieve more value in trading the USDJPY spot (upon BOJ delivery) given that it is in the 104s and there is plenty of room for upside (111+). Though, the more likely reason is that the market has a low expectation of a BOJ hit/ topside so they havent positioned for it - hence there isnt a big divergence of call over put purchasing.

3. EURYEN imo is a 2nd tier proxy trade for a BOJ miss which is confirmed by the options market, but i personally will trade GBPJPY. The only Benefit of EURJPY is perhaps that there is 8/9 less vols than GBPJPY so may move slower thus allowing spot traders to catch more pips.
Comment: *Correction*

EURYEN Current RRs are -4 NOT -10.
i went long based on my gut feeling an hour ago
Long UJ?

Not a bad bet.. we should see some topside - my advice, TP at 107 TOPS 109 as its likely to get faded very heavily (look at UJ 29th January after BOJ policy).
+1 Reply
hatzitesla QuantumLogicTrading
i was just wondering how can you know what are the hedge funds doing based on price action?...i didn't do any of that research just plotted my fibs. and my gartley and I took the shot...any sl suggestions? thank you
Its not based on price action in spot UJ.. its based on option volatility - basically in option theory you learn the only way to change volatility is to change demand e.g. an increase in volatility = increase in demand. So by looking at the 25delta puts/ calls and the difference in their vols you can tell which is being demanded more...

Even so you dont neccessarily know what the market is thinking as demand could be higher for two reasons 1) they could be hedging an opposite spot move (so they actually believe in the spot position) or 2) they actually are structuring options to speculate - so you dont know why they are demanding the puts vs calls or calls vs puts so you dont actually know what position theyre taking BUT you can make an educated guess.

I personally wont operate stops. I will get out ASAP if it turns sour or run two trades at the same time e.g. UJ long and GBPJPY short to hedge BOJ hit/ miss outcomes - IMO we could get enough pre-event vol for a strategy like that to pay off and TP 200-300pips on both on the swings but then again its looking pretty flat ATM so we could have a calm before the storm build up where only the prints are traded aggressively.
+1 Reply
hatzitesla QuantumLogicTrading
Thank you for the insight...how can you see the volumes of said puts/calls? Does your system have a name? And why you say spot? I thought the spot forex market is so vast it can't be influenced by options or futures markets? I am sorry if I am giving you a hard time explaining things I am only trading patterns on the charts.Thank you
Its not volumes its volatilities - you need to have an FX broker for live updates, but you can see old ones here - https://www.tradingfloor.com/tools/fx-options-vols-reversals-risk. Im not trading/ speculating on the options influence on spot - im not talking about volumes.

Like i said im talking about volatility - so you can see that there is a put/ sell bias in GBPJPY options market - so you can assume perhaps the spot market has the same bias. Obviously this isnt always true as youd be able to arbitrage liquidity but i like to use it as a rough guide to what the market is thinking, basically assuming spot=options, what traders are doing in spot is what they will do in options but like i explained above in points 1 and 2, this isnt always the case.
+1 Reply
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