FxWirePro: JPY hedging portfolios amid mixed bag of sentiments

It is noticed that the JPY crosses have been trimmed their previous gains in the recent past.

USDJPY marked at 113.441 the highest level since mid-July but trimmed to the current 112.276 levels. During the period, JPY underperformed within the G10 camp and lost roughly 3% in nominal effective exchange rate terms. EURJPY eased to 133.1960, AUDJPY is creeping at 87.634 levels.

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.

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.

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

Buy 3M 30D EUR puts/JPY calls vs. sell 3M 28D EUR puts/KRW calls.

Add longs in 2 lots of USDJPY 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.