Systemic Stress Periods For the Japanese Yen


The Japanese yen has the second largest net international position surplus in the G10 relative to GDP. The Japanese currency also benefits in periods of systemic stress and risk aversion caused by Japan’s huge net external surplus position.

Investment Backdrop

Most forex trading strategies have run short positions on the Japanese Yen. These strategies were adhered to in anticipation of the Bank of Japan quantitative easing measures and an expectation that the Bank of Japan’s action would spur an increase in Japan investor demand for foreign securities. BNP Paribas has so far noted Japan investors have not responded to the Bank of Japan’s policy action with aggressive outflows. The large short position that has been accumulated could be easily dampened if weakening in the risk environment will eventually result to an exodus from positions.

Forex Trading Strategies

BNP Paribas is recommending to buy 1x2x1 USD/JPY put fly. A 1m (Nov 8) 1x2x1, 95.5/93.50/91.50 USD/JPY put fly costs 0.23% (spot reference rate at 97.44). The trade results
in a max return of a 2.08% (for USDJPY at 93.50 in 1 month) and a max pay/premium ratio of 8.65:1. The trade aims the forex trading strategies to position for a modest move lower, consistent with a short lived intensification of debt ceiling concerns and gets shorter vol as USD/JPY moves lower.

Alternative Positions

The CHF is considered to be a better currency by BNP Paribas in times of crisis. The CHF appears to be an attractive play in limiting downside risks in the cross EUR/CHF. On one hand, the USD is holding up well as against the commodity bloc and European currencis in a crisis period. Similarly, the USD seems to be attractive relative to all currencies except for CHF.

Hence, forex trading strategies call for a constructive view on the USD/JPY in the fourth quarter to conclude the year at a fresh cycle as the US exits from its debt crisis and simultaneously push US yields higher again. BNP Paribas noted that the risks over the next two weeks are skewed to the downside and USD/JPY would test the 95 level again in the weeks ahead. Insignificant risks of direct MOF intervention in USD/JPY eradicates a volatile pace into the low 90s, followed by a spike in USD/JPY volatility.

Australian Employment

Meanwhile, the Aussie dollar is holding up well into the jobs data. BNP Paribas economists expected a below market consensus of a 5,000 increase in employment for the month of September. They agreed that unemployment rate to be constant at 5.8%. Australian economic mood improved lately as the Reserve Bank of Australia has shifted to a neutral stance. The resilience of the AUD amidst the economic challenges, suggest that the forex markets are keeping short positions on the AUD. The broker highlighted that the AUD is fragile in a period of debt ceiling stress in the succeeding days. But then, there is the prospect that could become a strong performer once again, as soon as US fiscal concerns end.

USD vs. European Currencies

On the debt ceiling space, price action continues to suggest investors remain cautiously optimistic on prospects for a debt ceiling agreement in the days ahead, with US equity markets ending in positive territory and the USD trading firmer. BNP Paribas reported that a resolution to the debt ceiling impasse is increasingly likely to be a last minute affair.

Market anxiety seems to build up into next week. USD/JPY will test lower in the days ahead. They recommend buying 1x2x1 put butterflies. USD will be more sustainable against the EUR and GBP. On one hand, they remain short EUR/USD and GBP/USD with more medium-term strategic trades anticipated.


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