FxWirePro: Deflation bothers BoJ’s Kuroda and Yen in turn – stay firm on USD/JPY put ladder

If inflation does not pick up again the BoJ will sooner or later (probably later) have to take further measures thus putting pressure on the yen. has been so hopeful since 2014 when core inflation reached close to 1.5%, he went on to announce that inflation will not fall back below 1%. The core inflation has now dropped to -0.1%. Now deflationary threat back in focus, most analyst think BOJ is too optimistic on its inflation targets.

From the above table, we can observe that 1 week contacts have reduced implied volatilities on the after the much awaited fed's meet which did not evidence any change in its rate policy, delta risk reversal for USDJPY is still highest negative values among entire G7 currency pool, this would mean that market sentiments for this pair have been bearish for this pair. The pair is likely to perceive higher implied volatility close to 10.8% of 1W ATM contracts (highest amongst the lot), thus we recommend deploying short put ladder spreads which would take care of potential slumps on this pair and significantly higher volatility times.

This strategy has already moved in as per our predictions and yielded desired returns, for now we still believe that same fluctuations would repeat again. Hence, stay firm with the execution: Shorting 2D (1.5%) ITM put option have done their jobs and simultaneously add longs on 7D ATM -0.49 delta put option and one more 7D (-1%) OTM -0.19 delta put option. The delta of combined position would be at 0.11. Maximum returns are limited to the extent of initial credit received if the USDJPY rallies above the upper breakeven point (BEP) but large unlimited profit can be achieved should the underlying exchange rate of USDJPY makes a vivid downswings below the lower BEP.