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Earning Theta As USD/JPY Remains Range-Bound

ByDanske Markets
Published 11/24/2011, 04:40 AM
Updated 05/14/2017, 06:45 AM


What stands out


  • EUR/USD has collapsed to trade below the estimate of our short-term financial model, albeit by less than 1 sd. There is thus still room for a further euro sell-off.

  • Our models indicate that the rise in EUR/NOK is overdone, and we will look for attractive levels to go long NOK – against either SEK, EUR or USD.

  • The ECB looks set to cut rates in December and our Correlation Monitor suggests that short positions in EUR/JPY (or SEK/JPY for more leverage) are the best way to express this view.

Strategy


  • Since the last round of BoJ intervention, USD/JPY has edged modestly lower. Spot is now trading at levels around 77, in line with our model estimate. Given current levels in relative rates, VIX and the price of oil, the model suggests that the spot should stay within the 75 – 79 interval with approximately 95 percent probability.
  • From a fundamental perspective, we see risks as dominating on the downside, as fear of a further deterioration in the global economic outlook is likely to weigh on USD/JPY. A new round of BoJ intervention seems unlikely at the current levels, but if spot should fall below 75 (our three-month forecast), further action to weaken the JPY is likely. Thus, also from a fundamental perspective, we see a good case for USD/JPY remaining stuck in an approximate 75-79 interval in the coming months.
  • To position accordingly, we suggest selling a 3M USD/JPY 75-79 straddle, while hedging the tails by going long a 70-83 straddle with double notional. The strategy yields an upfront premium of 0.92 percent (spot reference 77.35, indicative prices), and also benefits its holder in an adverse scenario where a large move in USD/JPY is triggered.
  • EUR/USD has collapsed from levels close to 1.43, but as the sell-off has stalled, technical indicators have recently signalled rangetrading. Lower Bollinger-band support is currently found at 1.3372, and with current stretched positioning it will likely take fresh shocks to propel a move lower in the pair.
  • Of the range-trading currencies, the recent price action looks most overdone in NZD/JPY, as indicated by the RSI reaching sub-30 levels.



Carry


  • Liquidity has improved in TRY, which continues to yield a very high carry – also compared to current levels of volatility
  • AUD interest rates have fallen as the money markets price in further expected RBA rate cuts (165bp priced in 12M), but the AUD interest rate pickup remains one of the most attractive from a carry-to-risk perspective

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