FxWirePro: USD/EM lower, USD/JPY higher, well-priced dual digitals to strike the balance

We add short EM vol risk on positive developments this week, tactical yen bearishness plays well alongside good-quality carry. So, we’ve have turned tactically bearish on the yen, expecting USDJPY to edge northwards at 114 in the weeks to come with French elections behind us and Treasury yields anticipated to rise somewhat in the run-up to the June FOMC from current benign levels (Fed funds strip priced for only one hike this year, while a few analysts expect two) alongside firming 2Q US growth to 3% SAAR.

Bearishness on the JPY can be allied to mainstream constructive views on other currencies (EUR and SEK for instance) or more traditional carry candidates (BRL, INR etc.) to generate additional leverage in multi-currency option structures.

As a class of trades, these have become more tenable as cross-yen correlations have rebounded smartly since the French elections (refer above chart); indeed, we had flagged high-beta yen-crosses to be the best value candidates for a post-French election risk rally.

The above chart runs us through dual digital prices across a select universe of currency combinations, and finds that [USD/EM lower, USDJPY higher] dual digitals are well-priced in the likes of INR and BRL.

2M [USDINR < 0.5% OTMS, USDJPY > 0.5% OTMS] dual digitals are indicatively offered @ 8.5% / 14.75% USD indicative offer.

2M [USDBRL < 0.5% OTMS, USDJPY > 0.5% OTMS] dual digitals are indicatively offered @ 12.5% / 16.5% USD indicative offer.