ECB Warns of Rising Inflation Risks Amid Iran War Energy Shock 
Bank of Japan Unveils New Inflation Gauge to Support Case for Future Rate Hikes 
Morgan Stanley: Fed Rate Cuts Still on Track Despite Oil-Driven Inflation 
Fed May Resume Rate Hikes: BofA Analysts Outline Key Scenarios 
South Korea Central Bank Signals Cautious Policy Amid Inflation and Middle East Tensions 
China's Refining Industry Faces Major Shakeup Amid Challenges 
Bank of Japan Governor Signals Accommodative Stance Amid Negative Real Rates 
European Stocks Rally on Chinese Growth and Mining Merger Speculation 
Trump’s "Shock and Awe" Agenda: Executive Orders from Day One 
Wall Street Analysts Weigh in on Latest NFP Data 
U.S. Stocks vs. Bonds: Are Diverging Valuations Signaling a Shift? 
Citigroup Delays Fed Rate Cut Forecast Amid Strong Jobs Data and Inflation Concerns 
Singapore Tightens Monetary Policy Amid Middle East War Inflation Risks 
UBS Predicts Potential Fed Rate Cut Amid Strong US Economic Data 
Moldova Criticizes Russia Amid Transdniestria Energy Crisis 
As widely anticipated, the Fed hiking cycle continued once more this year as FOMC raised rates by 25 bps (Fed’s Funds rate – 2.50%). At the same juncture, the Fed’s dot plot moved lower over the forecast horizon. These changes are steady with a softer inflation and economic outlook. On the flips side, BoJ has maintained status quo in its last monetary policy of 2018.
While subdued yen vol levels are moderately cheap, particularly at the long-end, when adjusted for the level of short-dated (3M) FX vol and USD and JPY interest rate volatilities (refer above chart) such that entry levels into strategic vega longs are reasonably attractive. It is true that JPMorgan’s forecast of 118 on USDJPY spot by mid-2019 – 4% above current market – is not conducive to higher yen vol when viewed through the traditionally inverse spot-vol correlation lens. Yet this disregards the change that has taken place in the Greek profiles of yen option books over the past few years due to corporate structures.
Since the advent of Abenomics in late 2012/early 2013 that turned around the post-GFC trend of steady yen strength, Japanese importers have been active buyers of USDJPY via net vol-selling structures such as knock-out (KO) forwards, with KO barriers set in a broad 125 – 140 zones depending on product vintage.
Though locally supplying vol to the street, these structures can swiftly lose vega if USDJPY were to approach 120, as option pricing models start pricing in some likelihood of structures knocking out; the reduced requirement to hold short vega hedges as a result can spur dealer demand for vol even in spot rallies. In other words, yen vol now boasts more of a two-sided, convex relationship with spot instead of the one-sided inverse link of the past, albeit it will require spot to break out of tight recent ranges in either direction to activate this more symmetric spot-vol correlation. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly JPY spot index is flashing at 149 levels (which is bullish), hourly USD spot index was at 37 (mildly bullish) while articulating at (06:44 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
