USDJPY: BUY THE 107 BREAKOUT - RISK-ON TO CONTINUE - BOJ/ BOE

USDJPY:

1. Been watching yen closely as my top 2 trades this week (along with GU). As expected/ foretasted 107 was the next key risk sentiment resistance level after 104 and after buying the 104 breakout i have confidence/ advise buying the 107 breakout - we have now crossed the 3m moving average at 106 which provides support/ confirms bullish move.

2 Risk has been depressed excessively in the past 6-months but more so directly after brexit - this risk rally (SP highs etc and UJ higher) isn't a fundamental change in risk sentiment imo (e.g. i dont forecast an UJ uptrend now) however i do believe this is a 2-4wk risk recovery before moving lower again back through the 104 level to the 102.

3. This risk recovery is being fueled by 1) JPY/ BOJ Stimulus hopes since the BOJ hasnt cut its rate since January the market expects strong easing from JPY Govt and BOJ. 2) Markets expect a 25bps cut in the Bank Rate and GBP80bn extension in BOE QE. 3) Several other CBs e.g. RBA/ RBNZ/ PBOC/ ECB are also expected to ease at some-point in 2016 so all speculations are being priced into this risk rally as upside. 4) As mentioned above, risk was depressed for several weeks into/ out of brexit so this is a recovery leg higher e.g. shorts profit taking/ washed out.

Volatility:

1. Current 25 delta Risk Reversals RR trade negative at -1.7, indicating either 1) the market is long Spot UJ but covering the downside possibility with options or 2) Option speculators like their chances with UJ lower - given the bullish bias id like to think the first is true. 2wk RR covering the BOJ however surprisingly trade close to flat at -0.3 - i see this as the market really not knowing what to expect/ sitting on the fence. Usually we see a strong bias to put's or call's but given BOJ/ Kurodas history (under-delivery) but also the current situation it makes sense why the market is flat with positioning.

1. IV 1wk and 2wk is: 11.41% and 19.27% and realised is: 6.35% and 13.16% - IV outperforming HV is a bearish signal but given the way markets have been rallying it is unsurprising that demand has increased (i dont see this as a bearish sign). Notably we see a spiking of 2wk IV at 19.27 vs 13.16HV which covers the BOJ meeting, thus clearly there is alot of anticipation going into the meeting.. i expect 28th vol to increase as we get closer to the event which could cause UJ selling however, BOJ expectations will outweight this (e.g. if 20bps + QE is expected we will see UJ upside).

Trading Strategy:

1. Buy USDJPY 107 break-out - should be 100pip+ squeeze as shorts are washed out as clearly there are alot of sellers in the market here who will have stops above the big fig (wait for confirmation e.g. high time frame close above 107.) 109TP1, 111TP2

- I don't see USDJPY breaking the pre-brexit recovery rally highs at 112 - if it we were to, this could perhaps signal a true shift in risk sentiment (e.g. market is now fully risk on).

- Late now but as initially mentioned this trade combined with the short GU worked well at hedging the risk-on risk-off dynamics at play (see attached) - still if GU retestes 1.33/4 shorts are strong at this level.

2. Assuming my initial assumption is correct e.g. <112 is the terminal rate for this recovery rally, I will then turn net seller of USDJPY and sell to 107TP1 104TP2 100.5TP3 but I will post about that nearer the time.

3. On a side note, if we were not to break 107 (unlikely as safe havens are taking heavy losses and stocks continue to make new highs) this level could be the risk sentiment pivot, but i would update if that becomes the case. If we do not break 107 today, it should be tomorrow as thursday is the traditional risk-on day.

Risks to the view:


1. Obvious risk to the view is that 1) JPY/ BOJ easing expectations wane which cause the bull rally to fade - something which is highly possible but more and more unlikely as we get closer (only 8 days away). 2) An unforeseeable risk-o
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