FxWirePro: Debit Put and Calendar Spreads to Bid JPY Longs

US existing home sales and the release of the minutes of the 1 August US Fed policy meeting are likely to attract limited attention. The last Fed meeting preceded the recent turmoil in Turkey and in some other emerging market economies. Market attention will instead be on Fed Chairman Powell’s appearance at the Jackson Hole Economic Symposium on Friday for a more up-to-date assessment of the economic outlook, especially in light of Trump’s recent criticism of tighter monetary policy.

Particularly, in this write-up, we emphasize especially on the long JPY trades, predominantly AUDJPY, were intended to hedge trade conflict and the possibility of a deeper slowdown in China. 

While the US President’s criticism of the Fed rate hikes has caused a stir for the US dollar. As a result, it seems unlikely that today’s minutes will provide any new revelations. Of course, the focus is on what will happen after the next rate hike planned for September. However, that is likely to heavily depend on other developments, in particular on what course the US administration will pursue in the trade war.

Subsequently, we added a tactical short in USDJPY in the belief that a shift in BoJ tactics to allow greater volatility in JGB yields could sponsor some short covering in JPY.

The trades haven’t performed as desired, partially because AUD has been reassured by Chinese measures to backstop growth and stabilise the CNY, in part because JPY was underwhelmed by the change in stance from the BoJ as near term JGB volatility was offset by the commitment to maintain a lower-for longer stance. 

Nevertheless, we uphold these trades given the intensification of EM stress and the potential for this to eventually leave a mark on US equities, which seems to be a necessary condition for USDJPY to sell-off. Whether this proves to be sufficient remains to be seen. 

Paid 36bp for a 1m 110.25-109.00 USD put/ JPY call spread on July 26th. Marked at 24bp. 

Long 3m AUDJPY put, strike 77.50, short a 3m AUDJPY 81.25-83.50 call spread. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 67 levels (which is bullish), while hourly USD spot index was at -81 (bearish), while hourly JPY flashes at -134 (bearish), while articulating (at 11:48 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex