FxWirePro: Spotlight on Performance of Yen-Cross Gamma Amid Trade War and Brexit

SGD vs. JPY correlations are priced materially higher than other high-beta or EM FX vs. JPY crosses on the escalation in trade tensions, Chinese retaliation with tariffs and Brexit dust with no-deal negotiation. 

USDSGD vs USDJPY: Yen-cross gamma has performed like a charm over the past few weeks, most notably during the rush for exit doors on risk sparked by the break of USDCNY through 7.0, followed by the equally volatile retracement shortly after the announcement of delayed/split tariffs.

Options markets have accordingly re-priced USDJPY vs. USD/high-beta implied correlations lower / high-beta cross-yen vols higher e.g. even after this week’s partial retracement, AUD vs. JPY 1M implied corrs (+12%) are more than 20% pts. below their late-July high. 

One yen-cross that defies this general rule is SGD/JPY. While the broad contours of the cross have tracked those of the rest of the JPY bloc, absolute levels of corr. are much higher (refer above chart) that make them ripe for option structures that benefit from de-coupling. Arguably, no JPY-cross correlation should be priced in positive territory in the current climate of recessionary fears, let alone in the mid-30s, and certainly not when trailing realized corrs are deeply negative (hourly 1-wk -9%, 4-wk -40%). The case for a stronger Yen in a falling US real yield, jittery risk climate is obvious; the case for a weaker SGD rests on Singapore’s high degree of exposure to the US/China trade conflict and expectations of impending MAS easing in October that informs the Asia team’s short SGD NEER stance. 

Consider the following dual digital structure: 3M (USDSGD > 1% OTMS, USDJPY < 1% OTMS) costs 10% (individual digitals 26% and 37.3% respectively). Courtesy: JPM