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FxWirePro: BoJ and Abenomics to cushion USD/JPY slumps – Leverage benefits through 2m vols

As per the Abenomics, which eyes on fresh fiscal easing, made possible by the fact that the BOJ has already bought a decent chunk of the government’s debt. That edges Japan closer to central-bank financed fiscal policy and raises the stakes – for the economy and the currency.

The capital outflows referred to above will remain JPY negative until at least mid-2016. And this figure does not include other public pension funds that follow GPIF and have only just started reallocating

If this latest throw of the dice delivers a sustainable acceleration in growth, the yen has scope to recover further, but the jury’s out.

However, the balance of payments data show significant long-term capital outflows from Japan, which suggest that the yen’s bounce, at these levels, is overdone.

As a result, we could foresee the USD/JPY to claw its way back above 110 in the coming months.

The Bank of Japan remains concerned by yen strength and could prevent a move below 100.

Since 1-3m IVs in this pair seems to be considerably spiking, the leveraged call spread can be deployed in FX portfolios saying thanks to high 2m volatility.

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