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Summary: USD trades higher after US10y yield trades back up above 3.0% while JPY underperform as rate differential comes back in play. USDJPY vols are sharply higher with 1 month up 2 vol since Friday close and risk reversals has flipped back to favor calls, 1 month now 0.25 for topside.
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USD trades stronger after US10y yield trades back up above 3.0% and JPY is sharply lower as rate differential comes back in play. USDJPY spot is up 200 pips from Friday close and touched 133.00 highs this morning, this is the highest level in 20 year.
Vols are sharply higher with 1 month USDJPY up 2 vol from Friday, now trading around 11.65, while 1 week is up 2.5 vol to 12.0. The whole curve is lifted with 1 year up 1 vol to currently trade 10.0. Risk reversals have flipped back to favor USDJPY calls out to 9 months with 1 month trading 0.3 for calls and 1 week at 0.60. The sharp move higher in vol has pushed the risk premium to just above 2.0 vol which makes USDJPY the most expensive currency pair in G10.
Next resistance comes in at 135-136 area and above that there is no targets before the 1998 highs at 147.66. We can’t rule out some corrections given the magnitude and speed of the recent move and we can expect BoJ to come in and try talk down UDSJPY when we get closer to 135. The trend is higher and the 135-136 resistance could easily be taken out if US10y makes new highs above 3.20. With that said we like to sell short dated USDJPY call with strikes at or above 135 after the sharp repricing of vol and risk reversals.
Sell 1 week 135.00 USDJPY call
Receive 20 pips
Alternative
Sell 2 week 136.00 USDJPY call
Receive 30 pips
Spot ref.: 132.85
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