Date: 16 Oct 2017

As a new week begins, there still remain sizeable option expiries in dollar/yen (USDJPY) that may influence the price action. Monday’s New York cut (1500h London time, 1400GMT) will see USD600 million of 112.00 expiries rolling off with another USD1.3 billion at 112.40-50 above that. With US yields remaining somewhat subdued after Friday’s tepid US CPI data, the pair has struggled to regain its poise after a sell off that then saw USDJPY dip to 111.69. Nor can the currency market rely on US economic data to kickstart the pair as this week is fairly quiet on that front. On the Japanese side, the snap election called by Prime Minister Shinzo Abe takes place next Sunday but opinion polls are suggesting a comfortable win for his government. Writing on Monday, National Australia Bank argued that such a political outcome “may help USDJPY trade above 113.00 but a sustained break above 114 is still dependent on US developments.” But that election is still a week away and there’s an argument that if the market assumes the polls are correct, then might not such an outcome start to be priced into the USDJPY rate ahead of time? Elsewhere, traders will have noticed that the Nikkei225 has continued to trade buoyantly. Indeed as Japan’s Nomura Bank wrote late last week “Japanese equity prices tend to perform well

Writing on Monday, National Australia Bank argued that such a political outcome “may help USDJPY trade above 113.00 but a sustained break above 114 is still dependent on US developments.” But that election is still a week away and there’s an argument that if the market assumes the polls are correct, then might not such an outcome start to be priced into the USDJPY rate ahead of time? Elsewhere, traders will have noticed that the Nikkei225 has continued to trade buoyantly. Indeed as Japan’s Nomura Bank wrote late last week “Japanese equity prices tend to perform well into snap elections, and the Nikkei 225 breached 21000 for the first time since November 1996.” While foreign investment into Japanese equities necessitates the purchase of yen, Nomura argues “based on ETF data, foreign investors’ preference for FX hedging has not changed materially recently” and that “if they keep their FX hedge ratio of Japanese equity exposure constant they need to sell JPY” Indeed Nomura’s own “estimate based on an assumption of a constant hedge ratio suggests there has been net JPY selling of FX flows related to Japanese equities held by foreign investors recently.” As for technicals, Singapore’s OCBC Bank feels “short term implied valuations for [USDJPY] … are looking underpinned with the 200-week MA (111.87) and the 200-day MA (111.79) expected to support on dips.” As traders formulate their opinions on dollar/yen at the start of the new trading week, there are many factors they might wish to consider.

Written by Neal Kimberley, External Currency Analyst.