My Plan & Expectations
1. My conviction for UJ is long 8/10.
-UJ traded to lows of 98.9 in the midst of the brexit hype, as the market hunted for risk off. Further, as with GBP it seems entities over the weekend have increased their JPY exposure to account for the increased percieved risk within the market causing UJ to open lower at 101.6
- However, over the weekend the BOJ had a meeting with other Japanese officials to discuss their plan (an easing plan likely) to combat 1. their problem and now 2. the JPY's safe haven demand strength - both of which are cured by 8/10 aggressive easing policies by the BOJ
- Thus I expect the BOJ to hold and emergency meeting this week announcing these changes to have immediate affect as UJ at 100 severely puts the brakes on their growth target.
- Further, as previously mentioned the BOE, SNB, FOMC and ECB (among others) have all said since the brexit vote that they are prepared to provide liquidity to markets and their rhetoric has been very dovish.
- Thus the BOJ's new easing package which is likely to be aggressive e.g. 20bps rate cute and a large increase , will help depreciate the currency through increasing supply and reducing jpy demand. Further, the supportive/ dovish stance of the worlds central banks (particularly BOE and FOMC) will help ease risk aversion which in turn SHOULD reduce JPY demand therefore helping UJ trade better to the upside.
So my trading plan for UJ is to buy at levels <102 - 101/2 is ideal (we are unlikely see 99 or 100 again as the risk-off impetuses have died). UJ should hold this range between 101.2 and 103 until CB meetings are in place - I will be holding UJ in the long term through to 110-115 at least. I have 8/10 long conviction for UJ
Current UJ ATM 50 delta vols trade at 37.5%, which is surprisingly 3-4x higher than it was last week (the risk and may not be over).
1wk UJ ATM 50 delta vols trade at 20%, significantly lower than current at 37.5% - I think this is a function of the meetings expected this week which are inflating current , with 1wk far vols lower as the events will have elapsed already.
1m UJ ATM 50 delta vols trade up on the week at 15.5% though the time curve is flattening meaning UJ vol is falling over time - lower vols = better conditions for UJ buying.
Current UJ Option demand is skewed significantly to the downside, with Puts 40% vs calls 36% thus puts are in demand by about 10% more than calls - this supports nearterm risk-off views (RR -4).
USDJPY as a measure of market risk.
I still suggest using UJ as a measure of GBPUSD market risk - the seemingly isnt over, and with near term uncertainty high, it is prudent to track UJ and use breaks of its 101.2-103.2 range as signals of net risk on or risk-off commitment .e.g. UJ higher risk on (jpy selling), UJ lower risk off (jp buying).
The risk off move for GU imo is lower in this environment, and the risk-on move is higher. Thus, IMO UJ and GU are sync'd, and the two should be used as a tool.