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FxWirePro: A run through on shorting 1y USD/JPY skews ahead of committed BoJ

The yen has erupted higher more recently than that (up 16% vs USD and 25% against GBP in 1H 2016 for example). That’s a reminder that when a currency is as cheap as the yen (USDJPY PPP is at 103 according to the OECD) it can spike pretty sharply. It is kept at current undervalued levels by the commitment of the BOJ to target a 2% inflation rate and anchor bond yields.

We see only a small chance of that commitment waning in 2018 because the inflation rate won’t get anywhere near 2%, but the net result is a huge skew in the range of outcomes for the USDJPY

The election of Shinzo Abe as Prime Minister of Japan brought the BoJ into the fray

Why shorting USDJPY 1y skew: In selling downside strikes, buying USDJPY puts is paying for the negative skew of low strikes. As we don’t see USDJPY collapsing below 100, we do not need to buy the full downside. So, we also finance our puts by selling the downside skew via put spreads.

In setting a topside knock-in: Near-term, USDJPY should be initially mildly supported by mounting US yields. This suggests conditioning medium-term put spreads by a topside knock-in.

Such a barrier will cheapen the vanilla trade, as the bearish skew discounts the market-implied probability of bullish moves.

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December 15 21:00 UTC Released

USOverall Net Capital Flows

Actual

151.2 Bln USD

Forecast

Previous

-51.3 Bln USD

December 15 21:00 UTC Released

USNet L-T Flows,Incl.Swaps

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7.9 Bln USD

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Previous

65.1 Bln USD

January 9 11:00 UTC 3375133751m

BRRetail Sales MM*

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Forecast

0.35 %

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January 9 11:00 UTC 3375133751m

BRRetail Sales YY*

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3.20 %

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January 9 11:00 UTC 3375133751m

BRRetail Sales YY*

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Forecast

3.20 %

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January 9 11:00 UTC 3375133751m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3375133751m

BRRetail Sales MM*

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Forecast

0.35 %

Previous

January 9 11:00 UTC 3375133751m

BRRetail Sales YY*

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Forecast

3.20 %

Previous

December 12 09:30 UTC 66606660m

GBRPIX YY

Actual

Forecast

Previous

4.2 %

December 12 09:30 UTC 66606660m

GBPPI Input Prices MM NSA

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Forecast

Previous

1 %

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