USDJPY continued to decline and traded in the low-108 handle, the lowest since mid-November 2016. However, the pair has rebounded since mid-April and as a result, JPY has been the weakest currency within the G-10 camp over the period.

Although we still expect a modest decline in USDJPY in the mid- to long-term and keep the year-end target at 105, we think the pair will likely trade firmly in the near-term.

This is mainly due to improved investors’ risk sentiments with receding concerns on North Korea and a positive result from French presidential election, and expected Fed hike in June which would lead to higher UST yields and wider U.S.–Japan spreads. Recently, the correlation between the U.S.–Japan spreads has strengthened further (refer above chart).

The correlation since March suggests that if 2-year and 10-year spreads reach their recent peaks, USDJPY will likely rally to high-114s and high-115s respectively.

Thus, overall we expect the pair could rally to as high as mid-115s, the upper-end of range since mid-January.

Bullish USDJPY scenario (Can hit upto 125 if):

1) Strong US growth leads aggressive Fed hikes and a spike in UST yields, resulting in broad USD strength,

2) Japanese government’s fiscal policy becomes more expansionary and the BoJ finances it, resulting in higher Japan’s inflation expectations

Bearish USDJPY scenario (Can drop to 100 if):

1) Global investors’ risk aversion heightens significantly,

2) Weak US economy dampens hopes for Fed hikes and leads broad USD weakness.

Potential trigger events:

FOMC monetary policy meeting on June 14th

OPEC’s weekly oil inventory reports on May 24th

Washington policy announcements on tax

G7 meet on May 13th

BoJ meeting on Jun 15-16th.

Option Strategy: Buy USDJPY 6m ATM straddle

Well, this options trading strategy that is used when the options trader ponders that the USDJPY would experience significant volatility but not sure of the direction of the swings.

Although we could see some sort of bearish sensation but to be in the range with the major trend goes in the consolidation phase, the recommendation goes this way:

Initiate long in 6m ATM +0.51 delta call, and simultaneously buy ATM -0.49 delta put of the same tenor for the net debit.