FxWirePro: Capital inflows and geo-political risks to drive Yen’s softness and hedging portfolios

JPY depreciation was notable amid firm global risk sentiments due to receded concerns for North Korea developments and expectations for US tax reforms.

For the coming month, the main focus for JPY will be a snap election which will be held on Oct. 22.

The prevailing issues over North Korea also continue to be the factor for strengthening the Yen, we also recognize that the Yen’s top-side is heavy, whereas the political uncertainty may temporarily weaken the JPY-global yield relationship.

We think the reasons behind the softness in JPY are Japanese corporate FDI and overseas portfolio investments.

Japanese corporates accelerate FDI between Jan. and Jul. this year and net- FDI recorded +77% increase compared to the same period of last year. Japanese investors net-bought foreign stocks more than ¥1trn of foreign stocks in the last 4 consecutive months.

Elsewhere, BoJ’s Kuroda was crossing the wires repeating that the BoJ will maintain current easy monetary policy as inflation remains far from 2% target. 

Japanese politics represents another complication for the global relation trade as the more uncertain election prospects are likely to weaken the otherwise tight relationship between the yen and US yields that has been responsible for the re-emergence of interest to fund long positions in rate-hiking currencies out of JPY.

While we need to be cautious of knee-jerk JPY appreciation from time to time, JPY’s topside is likely to be limited by those flows.

Add debit put spread for NZDJPY that reads this way, go long 6M ATM -0.49 delta put + short 2m (1%) OTM put with lower strike price with net delta should be at -0.40.

Hedge USDJPY via initiating longs in 2 lots of ATM -0.49 delta put option of 3m expiries, while one lot of writing 1m OTM put with positive thetas. The strategy should be held with a view to arresting further downside risks.

Elsewhere, we advocate upholding the prevailing bullish exposure in EURJPY via a call RKO as JPY weakening is likely to be a slow grind rather than explosive.

Sell 6M EURJPY 25D IVs and risk-reversal (buy EUR calls - sell EUR puts), delta-hedged.

Vol pts Positive smile theta participation in Euro bull-trend.

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