Consolidating After Sharp Rally, Implied Vols Elevated As BoJ Comes Into Focus

USD/JPY's downtrend has stabilized somewhat in the first part of Friday trade. We have spent most of session wedged between 153.50-154.00. There is an option expiry later (for NY cut) at the 154.00 level ($892mn), which may influencing spot trends so far today.

• Yen is the clear G10 outperformer in the past week, up around 2.4%, as risk off has gripped major asset markets (CHF is the next best performer up 0.9%).
• Global equities are more than 4% off recent highs, while the slump in global commodity prices, led by metals has raised global growth fears, and contributed to a sharp unwind in carry trade positions (AUD/JPY off -4.3% the past week, NZD/JPY down 4.4%). Still, the JPY TWI is only modestly above recent lows, see the chart below.
• Focus will be on the CFTC report later, although this will only be up to end Tuesday trade, where USD/JPY ended 155.59. So it may not reflect the full nature of JPY position adjustments that were likely through Wednesday/Thursday.
• We also get the US preferred inflation measure for June later this evening. This follows the Q2 GDP beat on Thursday, which provided some support to front end US Tsy yields (and therefore USD/JPY).
• Looking into next week, the BOJ meeting on Wednesday takes focus. The consensus rests with no change at this stage, although reports this week (including from Reuters) have suggested the central bank is still considering a rate hike. The other focus point will be central bank's planned reduction in bond purchases.
• 1 week USD/JPY risk reversals were last at -2.15, the 1 month -1.71, up slightly from lows earlier this week. We remain close to 2024 lows for both metrics. 1 week implied vol is +14.73%, the 1 month at 10.61%, also short of 2024 extremes.

Fig 1: JPY TWI - Deutsch Bank

Source: DB/MNI - Market News/Bloomberg