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Bearish USDJPY scenarios see 90 levels if:
1) The dollar weakness intensifies sharply on US-specific idiosyncratic factors;
2) Assessments for the prospect of a V-shaped global growth recovery are significantly tested;
3) Trade tensions between the US and China re-intensify with negative spillovers to Japan’s supply chain.
Bullish USDJPY scenarios see 115 levels if:
1) The outlook for the global economy recovers more sharply than expected and risk sentiment firms;
2) Momentum in JPY selling flows related to outward portfolio investment and FDI repeats on a similar exceptionally large scale as seen in 1Q’20.
While our perspectives on Japanese yen against the dollar remains above 100 levels. If not for liquidity constrains a contained yen upside could be efficiently expressed via defensive USDJPY OTM put calendars that utilize the once in a generation skew-vol setup.
We opt for fading the curve inversion via vanillas on the weak side of the riskies to avoid left tail exposure.
OTC Outlook:
The positively skewed IVs of 1m tenors of USDJPY contracts are still signifying the hedging interests for the bearish risks. We see bids for OTM strikes up to 105.50 levels, whereas 1w skews signal both bullish and bearish risks (refer 1st & 2nd nutshells).
To substantiate this directional stance, one can trace out fresh bids of positive numbers for the existing bearish risk reversal numbers, this also signals current hedging interests for the downside risks amid mild upswings (3rd nutshell).
Trade recommendations:
1) At spot reference: 107.120 levels, we advocated buying a 2M/2w USDJPY 108.910/102 put spread (vols 8.95 vs 8.55 choice), we would like to maintain the ITM long leg with the diagonal tenors on hedging grounds.
2) Advocated long in ATM/short 25-delta 3M USD put/JPY call spread @ USD 0.66% (when spot ref. 109.00, strikes 108.79/106.21).
3) Alternatively, shorting USDJPY futures contracts of mid-month tenors have been advocated, on hedging grounds, we upheld the same positions, as the underlying spot FX likely to target southwards in the medium run. Courtesy: JPM, Sentry & Saxo
