FxWirePro: How do Yen vols behave on BoJ’s event?

This week, major central banks (BoJ and BoC) are centre of attraction as they are scheduled for their monetary policies, on Wednesday, and there is a higher-than-usual degree of uncertainty. BoJ is most likely to maintain negative rates on hold. The Bank of Japan is expected to cut the growth outlook but keep policy unchanged. Judging from the rapid deterioration in exports and industrial production, GDP growth should have fallen sharply to close to 0% YoY in 1Q (negative QoQ is possible). This poses apparent risks to the BOJ’s FY19 forecast of 0.9%. Thankfully, core CPI remained stable in the range of 0.5-1.0% in 1Q. The expected inflation rate for the next one year also stood firmly, at 0.8% among enterprises and 3% among households. Steady inflation and inflation expectations should allow the BOJ to maintain the FY19 CPI forecast (0.9%) and argue that domestic recovery remains on track. The upside surprise from China’s March data, recovery in global risk appetite and dissipation of yen appreciation pressures should also provide some comfort for the BOJ.

Among G3 bloc, JPY has been an enigmatic 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. 

This wasn’t entirely happenstance, we have argued that structural capital outflows from Japan together with super-wide front-end differentials would dull the yen’s immediate sensitivity to certain falls in risk markets. 

But we don’t want to stick around too long to find out where the pain threshold for Japanese investors might actually be - we assume that even corporates will slow their accumulation of foreign assets in response to a sufficiently adverse set of macro or market conditions. 

The under-delivery of Asian vols should also not be overly surprising given that yuan stability has been the mantra during the ongoing US/China trade negotiations, with vol dampening spillovers onto regional currencies strongly anchored by the CNY. Some of these trends will persist into 2Q, others will fade, below is a list of our best guesses: What carries over from Q1 into Q2.

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 76 levels (which is bullish), while hourly USD spot index was at 60 (bullish), EUR is at -23 (mildly bearish), while articulating at (09:42 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex