FxWirePro: Yen crosses to lure in range-bounded trend with tepid ATM IVs – DNTs highly appealing on eve of New-Year

We find that yen crosses have strong potential for successful double no-touch (DNT) trades in 2018. 

Before we proceed further into the core area of this write-up, let’s just glance through the technicals of the intermediate trend of yen crosses (USDJPY and EURJPY) that have been drifting into the long lasting range. Since mid-January 2017, USDJPY has absolutely been oscillating between 115.624 and 107.318 levels. While EURJPY does the same between 134.881 and 131.169 levels from last three months and likely to persist in the similar range.

A glimpse through expansionary monetary policy: As inflation in Japan remains well under the envisaged target the Bank of Japan (BoJ) is condemned to maintaining its ultra-expansionary monetary policy for the foreseeable future. The fact that the government is continuing with its Abenomics programme also points towards a continued expansionary monetary policy over the coming two years. We, therefore, expect a weaker yen, in particular, if the US central bank Fed continues to hike interest rates as expected and the ECB slowly tapers its asset purchasing scheme.

Most importantly, the ATM IVs of these pairs have also been lackluster, refer above shown nutshell for the tepid IVs in the near-term.

Well, in a context of depressed volatility, range-bound currencies, and persistently low yields, DNT options are an appealing alternative to the underperforming carry trade.

A DNT sells volatility to deliver potentially substantial leverage. Unlike standard carry strategies, investors risk only a fixed premium, but they gain theta as long as two knockout levels are not hit.

Low volatility and DNT trading lead to a paradox: one looks to sell expensive volatility, but high volatility increases the risk of seeing a DNT knocked out. We propose and combine four intuitive indicators to identify the currency pairs offering the most attractive trade-off.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -96 levels (which is bearish). While hourly JPY spot index was at shy above 59 (bullish) while articulating (at 08:56 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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