Triggered by the global financial crisis, USD/JPY has been in a downtrend since June 2007 resulting in a cumulative 38% loss in competitiveness. Recently, however, this USD/JPY downtrend has slowed and now appears poised to reverse.
Japanese investor repatriation flows, so crucial in providing an additional source of JPY demand following the March 2011 Sendai earthquake, now show signs of weakening. If exhausted, this removal of repatriation flow pressure in Q112 will lift USD/JPY.
Growing Japanese corporate retaliation to JPY strength, following perceived successful currency interventions in other safe-haven currencies, could become a significant political issue in 2012. The latest trade deficit data lends weight to such arguments.
This confluence of factors, alongside the recent USD/JPY stabilisation, warns USD/JPY is poised for a meaningful reversal. With implied volatility still cheap and unusually skew moving in favour of USD/JPY calls, we recommend customers position to take action now. We have included a few directional and hedging strategies.
Buy a 3M (25 April) ATMF 78.10 USD/JPY call* costs 1.81% of USD face value* (indicative), using 77.17 spot.
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CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK