Synopsis:

ING observes the emergence of new buyers in the USD/JPY market and does not expect the pair to drop below the 140 level in the near term.

Key Points:

1. Carry Trade Unwind:

   • Extended Unwind: ING previously discussed the potential for an extended unwind of the carry trade beyond speculative positions, impacting banks and non-bank financial institutions that fund operations cheaply in yen.
   • Hedging Activity: The one-year FX options market indicates that these institutions are now hedging, as evidenced by the increased demand for yen calls in the one-year USD/JPY risk reversal.

2. USD/JPY Correction:

   • Correction Extension: ING acknowledges that the correction in USD/JPY could extend to the 140 area, which was previously seen as an outside risk.
   • Support Levels: Despite the recent movements, ING does not see USD/JPY dropping below 140 in the near term due to the emerging layers of buyers.

3. Market Dynamics:

   • Bid for Yen Calls: The significant demand for yen calls in the options market supports the view that the correction may have a floor around the 140 level.
   • Buyer Emergence: The new layers of buyers suggest strong support for USD/JPY at current levels, preventing a drop below 140.

Conclusion:

ING highlights that while the correction in USD/JPY could reach the 140 level, new layers of buyers emerging in the market make it unlikely for the pair to drop below this level in the near term. The increased hedging activity in the one-year FX options market, particularly the demand for yen calls, reinforces this view.