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145.00 Caps Strong USDJPY Bounce, Risk On Weighs On Greenback

  • An extension of recent risk optimism across equity markets on Tuesday weighed on the greenback overall, with the USD index falling around 0.35%, and in the process, narrowing back in on last week's four-month lows.
  • Bucking this trend was a higher USDJPY, as a product of some notable JPY weakness overnight that extended across European hours. This was as a result of the Bank of Japan board deciding unanimously to keep yield curve control policy, including the negative interest rate, and pledged to continue patiently with monetary easing amid high uncertainty on economies and financial markets.
  • Price action saw USDJPY rise to as high as 144.96, an impressive 271 pips off the earlier session lows. Given its previous significance, this seemed a good area for the rally to halt and the broader greenback weakness in US hours saw the pair fade back to just below the 144 handle.
  • EUR/JPY was an outperformer, rising 1.25% on the session. Options volumes have been buoyed by trades consistent with sizeable call spreads that crossed in early Europe/very late Asia, and again at the NY crossover. Trades target upside in the cross via a 160/162 call spread, and captures the next BoJ rate decision on January 23rd. 6m implied vols in the cross remain supported despite the pullback from BoJ-inspired highs. The gauge trades either side of 10 points and looks to have bottomed out at end-November.
  • Relentless optimism in equity markets also bolstered the likes of AUD and NZD. AUDUSD convincingly cleared $0.6735 (as well as $0.6691, the former bull trigger) to print the best levels since late July. The moves further narrow the gap with the next upside level of 0.6821, the Jul 27 high. Options markets moving in sympathy with spot so far Tuesday, prompting AUD/USD 1m risk reversals to edge to just 0.4 points in favour of puts, the small put premium since mid-2020.
  • UK November inflation data headlines Wednesday’s docket. US consumer confidence and existing home sales will also cross.

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