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Q4 Outlook for Investors: Diversify like it’s 2025 – don’t fall for déjà vu
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USDJPY Braces for Volatility as December US Data Looms
Danny Khoo
Sales Trader
USDJPY has gained 1.4% in the month of November and continues to trade volatile on the back of many potential changes in Japan:
- Fiscal stimulus: Japan announced a massive package (~¥21.3 trillion), raising concerns about debt sustainability.
- BoJ policy shift: Gradual exit from ultra-loose policy and reduced bond purchases as core inflation remains above 2%, fueling expectations of further rate hikes.
- Investor behavior: Domestic institutions (banks, insurers) cutting long-term JGB purchases as BoJ gradually normalizes policy to avoid mark to market losses. This drives long term bond yields higher, reducing yield differentials with the US.
- Surging JGB yields pressures the yen carry trade (investors borrowed cheap yen to invest abroad), which may lead to funds repatriation into JPY.
If you are bearish on USDJPY:
Consider selling a Ratio Risk Reversal to receive premiums while expressing a bearish view on USDJPY. Due to the put-call skew with puts being more expensive, you can consider selling 2 calls for every put option you buy. Use the 3 week date 22nd Dec to cover the Fed meeting on 10th Dec, NFP data (Nov) on 16th Dec and US CPI (Nov) on 18th Dec.
- In the ratio of 1:2,
-Buy 3 week (22 Dec) USDJPY put option at strike 154.00 (1).
-Sell 3 week (22 Dec) USDJPY call option at strike 157.00 (2).
Risks
Watch out for USDJPY breaking above 157.25 as this strategy could lead to losses above that level. Both the max loss and max profit is unlimited – losses accumulate if USDJPY rises above154.25 (from the call options) and profits start to grow if USDJPY falls below 154 (from the put option).
If you are bullish on USDJPY:
Consider buying a Risk Reversal expiring on 22nd Dec which covers all the US data in December. You will receive premiums trading this option strategy.
-Buy 3 week (22 Dec) USDJPY call option at strike 157
-Sell 3 week (22 Dec) USDJPY put option at strike 154.
Risks
Watch out for USDJPY breaking below 153.90 as this strategy could lead to losses below that level. Both the max loss and max profit is unlimited – losses accumulate if USDJPY falls below 153.90 (from the put option) and profits start to grow if USDJPY rises above 157.00 (from the call option).
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