MNI MARKETS ANALYSIS - Takata Raises Carry Trade Reversal Concerns

Highlights:

• Year-to-date weakness in JPY has exceeded market expectations, raising the options-implied pricing of further JPY downside after the March, April BoJ decisions
• The inverse relationship between USD/JPY spot and implied vols reinforces the dominance of the carry trade in muted markets
• Prelim Rengo pay tallies provide the next point of interest, with the first of several tallies in March seen showing pay rising at fastest rate since 1992

We have written in recent weeks that low levels of implied vol have cleared the way for further JPY weakness, as the subdued backdrop allows for the dominant carry trade theme to dictate spot fluctuations. Takata’s comments overnight not only being reflected in spot, but implied vols are bid across the JPY curve also. 6m implied vols are bid Thursday, posting the biggest one-day uptick of the year so far, and largest since December. Any mean-reversion higher for vols should prove supportive of any USD/JPY correction lower, although we still see the trend outlook remaining bullish and today's sell-off - for now - appears to be a correction.

Full piece here:

MNIJPYF290224.pdf