Heavy Skew

Subscriber-only

The BOJ USDJPY put skew is incredibly high. Almost as high as at peak COVID panic.

by Brent Donnelly

March 9, 2023

What metal on the periodic

table has the symbol: W?

Current Views

Short USDJPY at 136.90

Stop loss 138.56

Take profit 132.36

Added today:

Buy 137.50 USD call and sell

134.50 overnight USD put

March 9, 2023

Heavy Skew

Before we get started… A fun thing…

The 2023 Spectra Markets NCAA Basketball pool is now open.

You can sign up here at CBS. The password is: amfx.

Here’s the deal: Anyone can play, anyone can win¹. Send it to your friends, tell anyone.

First Prize: A 2″ tungsten cube and a sweet Spectra hoodie.

Prize Value: $499.

Why a tungsten cube? They’re odd, interesting and weirdly heavy. And a fun throwback reminder of peak crypto silliness/euphoria.

Second Prize: Hardcover copies of “Alpha Trader” and “The Art of Currency Trading” plus a dope Spectra hoodie. Prize Value: $140.

Third Prize: One drippy Spectra hoodie. Value: Priceless.

Fine print: Your name might appear in am/FX if you do well. Brent Donnelly is the final arbiter of all controversies surrounding the final outcome and prize awards.

Please don’t ask me questions about scoring, or how to fill in your brackets, etc. Those answers are all on the CBS website. The deadline to submit is 16MAR at noon.

—

¹ Employees of Spectra FX and Spectra Markets and people with the last name “Donnelly” can play but cannot win prizes… We will play for bragging rights but not swag.

USDJPY options are going crazy

This chart shows the risk reversal for overnight USDJPY. USDJPY puts are selling for 8 or 9 vols over calls. That would make sense in some situations, but with NFP on Friday, I think this skew is way too rich. My view has been that the BOJ is underpriced and now my view is that it’s overpriced.

Also, it’s kind of a miracle that my short USDJPY is in the money considering Powell. That is the power of the techs up there 137/138 and the runup trade combined.

USDJPY overnight risk reversal

With the short USDJPY cash position in place at 136.90 (see am/FX: Short USDJPY from March 2), I think the trade now is to sell the risk reversal. That is, buy an overnight 137.50 USDJPY call and sell a 134.50 USDJPY put for zero cost. Then, worst case is you stop out at 137.50 and lose 60 pips and if the BOJ goes, you (probably) made 240 pips. This price is ballpark and not guaranteed to be accurate but it’s close enough for explanatory purposes.

This strategy is especially good here because I want to be flat USDJPY into NFP anyway. I can’t see a single high-frequency indicator that suggests NFP will be weak and while it’s been strong 10 months in a row, economists appear to be hopelessly anchored on models that do not factor in the generational shortages in the US labor market.

This long article from Bloomberg is a good example of what is going on with US labor shortages. There are many more articles like this. Here is a chart from that article that nicely supports the argument that this isn’t just about COVID, the labor market was heading into a supply shortage beforehand and now that has been turbo accelerated by retirements and other COVID impacts.

Demand for US labor was already surpassing supply before COVID

Fed making BoC’s life harder

A hawkish Fed with the Bank of Canada on hold makes it harder for Macklem et al. to control inflation in Canada. This Bank of Canada research paper provides a good explanation of USDCAD inflation passthrough to Canada CPI. A hawkish Fed puts a limit on how dovish the BoC can get because if they get too dovish, they will be punished on the exchange rate side and then be forced to react to that anyway. This is a limiting factor on the dovish BoC rates trade.

Final Thoughts

Did you know if you type numbers into a Bloomberg screen, you can do quick math?

Have a heavy metal day.

good luck ⇅ be nimble

Tungsten (yellow bar) is dense!

Tungsten is one of the toughest things found in nature. It is super dense and almost impossible to melt. It is extracted from wolframite and has the chemical symbol W from the German word for tungsten, which is “wolfram”.

A 2” tungsten cube weighs the same as…