BOJ: JPY V USD, EUR, GBP - WHAT THE OPTION MARKET IS TELLING US
Updated
50 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.
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.
Note
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.
Note
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.
Note
*Correction*EURYEN Current RRs are -4 NOT -10.
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