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The major component of the G3 FX vol bloc is JPY that has been an enigma for many investors over the past year and is likely to remain that way in light of the structural shift in Japan’s BoP (outflows) that is muffling the currency's normal anti- cyclicality.
Japan's current account surplus widened to JPY 2.68 trillion in February 2019 from JPY 2.14 trillion in the same month a year earlier and in line with market consensus. This was the largest current account surplus since March 2018, as the primary income surplus increased to JPY 2.01 trillion from JPY 1.95 trillion last year and the services surplus rose to JPY 0.24 trillion from JPY 0.17 trillion.
In addition, the goods surplus went up to JPY 0.49 trillion from JPY 0.20 trillion a year ago, with exports falling 1.9 percent and imports dropping at a faster 6.6 percent, while secondary income deficit shrank to JPY 0.06 trillion from JPY 0.18 trillion. Considering the first two months of the year, the current account surplus widened to JPY 3.28 trillion from JPY 2.75 trillion in the same period of 2017.
Yen vols will likely continue to disappoint since the stepped-up Japanese outflow story is structural in nature, and especially so through early Q2 when vol-supplying importer hedging flows tend to still be active.
There is little value in chasing vega lower from current levels, but we are amenable to selling relatively elevated risk- reversals for financing optionality in yen-crosses (e.g. the FX macro portfolio is running EURJPY puts financed by shorting USDJPY puts as a bearish Europe expression). Courtesy: JPM
Currency Strength Index: FxWirePro's hourly JPY spot index is flashing at -46 levels (which is mildly bullish), hourly USD spot index was at 3 (neutral) while articulating at (13:24 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
