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USDJPY does not seem that vulnerable into and through the September 21 Bank of Japan (BoJ) policy decision. We highlight the potential for disappointment and a possible market reaction similar to that observed in July and April, with the risk of the extended move that followed the January misfire.
The downside risk is not amplified but remains intact by the escalation in expectations relating to the policy outlook. USD/JPY gained 0.35% to a one-month high of 103.86.
On the data front, today’s attention will be squarely on the US September labour market report. Nonfarm payrolls in the prior month posted a weaker-than-expected rise of 151k.
Weekly jobless claims over the past month, however, provide no indication that the labour market is faltering and so we expect a sizeable monthly payrolls gain of 195k in September, above the market consensus for 172k.
The unofficial ADP figures showing a rise of 154k in private payrolls may, however, point to downside risks. We also forecast a fall in the unemployment rate to 4.8% from 4.9%.
OTC updates:
As per the nutshell showing implied volatilities and delta risk reversals, USDJPY is the pair to have highest 1m IVs with hedging sentiments for downside risks in this tenor as a result of above fundamental drivers. Whereas the long-term hedging arrangements for downside risks still appear to be intact. Hence, we recommend below option strategy so as to match the above fundamental as well as the OTC scenarios.
While USDJPY pin risk is seen in options expiring on this Friday at strikes 101.25, FX Options strikes in large notional amounts, when close to the current spot level, can have a magnetic effect on spot prices. That is, the spot may trend around those strikes as the holders of the options will aggressively hedge the underlying delta.
Option Trade Recommendation:
USDJPY is trading at 103.889 (i.e almost more than 1-month highs), the highest since August series. So while the market is happy to buy USDJPY as a positively convex play on the next BoJ meeting, the result of such demand is that USDJPY is now 2% expensive compared to the 10Y rate spread. Hold a USDJPY put fly (104.777x103.844x103.223 in 1x2x1 notional) with 2w expiry.
