FxWirePro: BoJ unlikely to change in monetary policy - Hedging vehicles for AUD/JPY risk averse, slackers in bullish and bearish scenarios

BoJ is scheduled for monetary policy meeting: The tomorrow’s BoJ policy meeting is deemed to be a non-event. The basic contours of growth and inflation have not changed since the last meeting in July, and the BoJ will not release an Outlook report. More importantly, the hurdle for further easing is high given concern about effects on the financial industry, while we think tightening is off the table as the distance to the 2% inflation target is enormous. BoJ sets the policy rate on IOER (O/N) and targets 10-year JGB yields as policy guidance.

Where the impacts on JPY of North Korea’s actions have been limited so far, if North Korea continues to push its boundary, we cannot exclude the possibility that JPY becomes more sensitive over its actions.

Bearish scenarios:

1) The unemployment rate moves back towards 6%, forcing the RBA to respond more aggressively to weak inflation;

2) China data weaken materially.

Bullish scenarios:

1) China eases policy and commodities rebound;

2) The RBA adopts a more hawkish tone to its communications.

So far, RBA outlook seems to be on hold for some time which is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.8% to 2.3% range, as long as core inflation remains below 2%.

While JP Morgan’s projections of AUDJPY at 81 by Dec’2017, 79 by Q1’2018.

Hedging framework (AUDJPY):

On hedging grounds, risk-averse traders, capitalizing ongoing rallies of the underlying spot FX, we advocate shorting a 3M in premium-rebate notional and buying a 6M 84.250 AUDJPY one-touch put.

Those who wish to reduce cost of hedging; we advocate buying 4M sell 2M AUDJPY OTM put at 86/90.159 strike in 1:0.753 notionals.

Vols of 2m tenors are at lower side which is conducive for option writers, hence, we’ve chosen ITM striking put as we agree with JP Morgan’s projections.