So the Bank of Japan meeting is next week and we are at an interesting junction regarding Yen pairs and the situation Japan is currently in.
Saving you a couple of paragraphs of reading, I will straight up say that I think EURJPY puts expiring next week Friday 26th are worth a while. Now, let me delve deeper into the reasoning behind why this trade can prove to be extremely lucrative or kinda ruinous at the same time.
Bank of Japan has found itself wrong footed for the better part of the last couple of years as the US interest rates exploded and Japan refused to hike which perpetuated a vicious USDJPY. The cycle was broken when the Bank of Japan entered its speculative mode doing what it does best - trading forex. Specifically, the USDJPY pair is their absolute favorite.
Historically speaking, Bank of Japan has a great trading record when it comes to intervention levels and they hardly lose money on their bets/trades/whatever you want to call it. The point is that Bank of Japan in the end always wins and I do not think this time is going to be an exception.
During their intervention, BoJ bought metric shit tons of their currency (JPY) and sold off dollars. Now, IF they do not do something during the upcoming meeting such as hinting on rate increases or outright drastic surprise hike, their trade will go down the shitter. BoJ can only fight the market for so long until it will be forced to capitalute. The officials at BoJ know this fact rather well and are kind of known for their surprises. Do I think they will outright hike the rate? I do not know, I find it not likely, but the incentives are stacked in their favor.
US has cuts priced in which are slowly getting phased out for a more coin flip odds. The window of opportunity before the market switches on to pricing rate hikes can be slowly closing. If the inflation spectre comes back, which could be the case for 2024, USD will make another run against Yen and BoJ will have their hands tied.
When it comes to market expectations, nobody is expecting anything drastic to come out of the meeting. This could be a good incentive to maximize the market impact for the PnL of their position as everyone would be caught off wrong footed. A cheap way of staving the inevitable loss on their USDJPY unless conditions change and the change of conditions is nigh in my opinion.
Since I do expect that the US might eventually start pricing in either hikes or stability in the interest rates, I do not think the USDJPY pair is going to be the best one to trade. When it comes to this trade, I would opt for the puts in EURJPY pair for a couple of reasons. The first reason is that the EUR has a chance that the market will start pricing in cuts for March. This combination of BoJ hinting at hiking or straight hiking mixed with the expectations of an ECB cut would be the deathknell for EURJPY. Remember, the ECB meeting is next week as well.The other reason is that companies are having a lot more trouble in Europe which is deflationary so I think the inflation in Europe is going to stay a bit lower than in the US where the full final manifest of inflation is yet to be seen.
With EURJPY trading at 161,4 cca, I would say we could end next week around 158/159 territory at worst and at best we will be trading below 150, but this is probably too optimistic.
Of course, this is not investment advice.
Saving you a couple of paragraphs of reading, I will straight up say that I think EURJPY puts expiring next week Friday 26th are worth a while. Now, let me delve deeper into the reasoning behind why this trade can prove to be extremely lucrative or kinda ruinous at the same time.
Bank of Japan has found itself wrong footed for the better part of the last couple of years as the US interest rates exploded and Japan refused to hike which perpetuated a vicious USDJPY. The cycle was broken when the Bank of Japan entered its speculative mode doing what it does best - trading forex. Specifically, the USDJPY pair is their absolute favorite.
Historically speaking, Bank of Japan has a great trading record when it comes to intervention levels and they hardly lose money on their bets/trades/whatever you want to call it. The point is that Bank of Japan in the end always wins and I do not think this time is going to be an exception.
During their intervention, BoJ bought metric shit tons of their currency (JPY) and sold off dollars. Now, IF they do not do something during the upcoming meeting such as hinting on rate increases or outright drastic surprise hike, their trade will go down the shitter. BoJ can only fight the market for so long until it will be forced to capitalute. The officials at BoJ know this fact rather well and are kind of known for their surprises. Do I think they will outright hike the rate? I do not know, I find it not likely, but the incentives are stacked in their favor.
US has cuts priced in which are slowly getting phased out for a more coin flip odds. The window of opportunity before the market switches on to pricing rate hikes can be slowly closing. If the inflation spectre comes back, which could be the case for 2024, USD will make another run against Yen and BoJ will have their hands tied.
When it comes to market expectations, nobody is expecting anything drastic to come out of the meeting. This could be a good incentive to maximize the market impact for the PnL of their position as everyone would be caught off wrong footed. A cheap way of staving the inevitable loss on their USDJPY unless conditions change and the change of conditions is nigh in my opinion.
Since I do expect that the US might eventually start pricing in either hikes or stability in the interest rates, I do not think the USDJPY pair is going to be the best one to trade. When it comes to this trade, I would opt for the puts in EURJPY pair for a couple of reasons. The first reason is that the EUR has a chance that the market will start pricing in cuts for March. This combination of BoJ hinting at hiking or straight hiking mixed with the expectations of an ECB cut would be the deathknell for EURJPY. Remember, the ECB meeting is next week as well.The other reason is that companies are having a lot more trouble in Europe which is deflationary so I think the inflation in Europe is going to stay a bit lower than in the US where the full final manifest of inflation is yet to be seen.
With EURJPY trading at 161,4 cca, I would say we could end next week around 158/159 territory at worst and at best we will be trading below 150, but this is probably too optimistic.
Of course, this is not investment advice.