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Mar 11 - 10:55 AM

SocGen: Strategy for USD/JPY Ahead of BoJ Meeting

By eFXdata  —  Mar 11 - 09:30 AM

Synopsis:

Société Générale recommends engaging in bearish USD/JPY trades in anticipation of the Bank of Japan's (BoJ) meeting on 19 March, as the market shows significant short yen positions amidst one of the most notable policy divergences between the US and Japan seen in recent times. With the BoJ hinting at hawkish policy shifts, SocGen sees an opportunity in the widened skew towards low strikes, which presents a favorable condition for financing bearish strategies by selling downside risk. Specifically, SocGen suggests buying USD/JPY put spreads and reverse knock-out options as a strategic approach to capitalize on potential yen appreciation.

Key Points:

  • BoJ's Hawkish Signals: Recent communications from the BoJ indicate a readiness to shift policy, potentially acting before the 19 March meeting, raising the specter of yen appreciation.
  • Market Positioning: The current market is heavily short yen, amplifying the impact of any policy-driven yen strengthening.
  • Strategic Recommendations:
    • USD/JPY Put Spread: Buying a 2-month put spread with strikes at 144/142 offers a leveraged payoff with a maximum potential of 6.7 times the premium paid, based on a spot reference of 149.80.
    • Reverse Knock-Out Option: Purchasing a 2-month put with a strike at 145 and a reverse knock-out at 139 provides a cost-effective bearish position relative to a vanilla option.

Conclusion:

In light of the Bank of Japan's potential policy shift and the existing market dynamics, SocGen advises investors to consider bearish positions on USD/JPY through put spreads and reverse knock-out options. These strategies are designed to exploit the anticipated yen appreciation while managing risks and costs effectively, offering a prudent approach ahead of the critical BoJ meeting.

Source:
Société Générale Research/Market Commentary

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