JPY sentiment still bullish, but may be shifting - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the USD/JPY is currently trading in a wide but narrowing range as the market sentiment appears to be mixed judging by market commentary. 

Key Quotes

“There are still may that see the USD/JPY in a downtrend.  Japanese exporters and fund managers have long been more inclined to believe the JPY can strengthen further and many of the negative views on USD/JPY are reported to come from Japanese banks and investment managers. Trend following traders in the Chicago FX futures market have retained a net long JPY position since January this year.

JPY volatility has increased this year, both actual and implied to around the highs since 2013.  Perhaps it is surprising that 1 mth ATM vol, covering the 21 September policy meeting, hasn’t picked up even more.

However, the options market is pointing to more balanced two-way risk than it has for some time, suggesting that the market may not be as biased towards expecting a stronger JPY as it has been much of this year. 1 mth USD/JPY 25 delta call less put option prices (risk reversals) have risen since around the 26 August Jackson Hole Symposium to a more modest net skew towards puts.

Sentiment is mixed, perhaps still biased towards expecting a stronger JPY.  This suggests that there may be scope for USD/JPY to rally significantly if, as we expect, the BoJ adjusts policy to engineer a significant reverse policy twist, lowering the NIRP and reducing its purchases of long-term bonds, designed to steepen the yield curve via both lower short-term rates and higher long-term rates.”