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NZDJPY in next 1-2 week: The yen continues to underperform most currencies, which is unsurprising given the risk-seeking mood since the US election. NZDJPY’s momentum is strong but the mid-83s is a very sticky area.
The BoJ is likely to be fairly happy further on its decision with recent developments outside its province. While the Japan data pulse (WSURJADP Index on Bloomberg) sits close to 18 month highs; Tankan report rose for the first time in 6 quarters (large manufacturers) and the inflation pulse is set to rise in coming months as the ¥ slump and commodity price explosions feed into import prices.
Near-term risk events in Japan are dominated by the BoJ meeting Tuesday though no change in policy was observed. We also have Nov trade data on Monday and Cabinet Office monthly on Wednesday.
To address this significant event and position our hedging framework, we had already advocated writing ITM call options in call ratio back spreads just a week ago, please refer below weblink for more details:
The strategy reads this way: Longs in 2 lots of 1m at the money gamma call options, simultaneously, writing 1m (1%) in the money call options and the strategy was constructed at net debit, risk averse can also prefer diagonal expiries in this strategy.
Well, the same gamma calls were encouraged in call ratio back spreads as a hedging vehicle and they proven us right, this was estimated based on 1w/1m IVs and risk reversals, for now, we look ahead for the performance of long legs.
The underlying spot FX rate of this pair is trading at 81.352 which is below 7DMAs.
Hence, 1% ITM shorts have served to reduce cost trade as NZDJPY spot rates have collapsed way below 82.77 (the spot rate when advocated). The prevailing spot reference: 81.352 testing support at 21DMA (i.e. 81.0830 levels).
In a medium term perspective, with the BoJ continuing its ‘soft taper’, but the question is that are we actually seeing any compelling Japan-centric reasons to sell further ¥. We are thus skeptical on ongoing declining streaks in NZDJPY would persist during the quarter ahead. In contrast, more likely, we hopefully see the bounce back above 81.8030, so stay firmly positioned with the strategy that we’ve advocated.
