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SocGen: Use Inverted Vol. Structure To Position For BoJ YCC Move In USD/JPY Options

JPY

Societe Generale note that “10-Year yields have breached the upper target of the BoJ’s permitted band, poking holes in the implementation of the Yield Curve Control. Incoming BoJ Governor Kazuo Ueda has indicated that current domestic stimulus conditions will be gradually removed.”

  • “However, given tempered expectations for the spring wage negotiations, the current monetary conditions are likely to still be maintained until June, with any tweak set to provide tailwinds to JPY when it happens.”
  • As such, they suggest taking “advantage of the inverted vol. term structure) to enter into Put diagonals.”
  • They recommend doing so via a “long USD/JPY 6-month Y128 Put (premium: 1.84% USD, ATM vol. ref: 11.08, delta: -32.5%) financed by 3-month USD/JPY Y131 Put (premium: 1.27% USD, ATM vol. ref: 11.65, delta: 32.6%) at 0.57% USD.” This “provides a 70% discount to the 6-month vanilla put, with breakeven at expiry of Y127.22.”
  • Societe Generale also recommended “tactically reducing exposure to the short leg should there be further topside moves. Risks to the trade are an earlier than expected tightening by the BoJ and further upward revisions to U.S. terminal rates following the expiry of the 3-month leg.”
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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