Just wanted to share some thoughts on USDJPY ..
1. Private bank customers positioning (I think this is a big driver recently)
In the past 1 year or so, there has been an increasing interest in Pivot structures. Pivots were somewhat like double sided accumulators that work on both sides, but if the market exceeds the boundaries on the fixing date, customers are obliged to deliver double the amount at the strikes.
Usually popular ones which have been profitable include EUR, 1.27-1.33 range, pivot say 1.30, and not so profitable recently, say USDJPY @ 76-84 range, pivot around 79-80. Its quite obvious to see the USDJPY structure is now the pain trade for the private bank space. From the chart below, you can see that from as far back as May 2012, USDJPY has started a nice range trade behavior. Additionally, ranges from Aug to Oct, would be the region where I suspect, a lot of pivot structures were put on for 1 year tenors.
Speaking to friends in the industry, it would appear that the private bank space are short double amounts in USDJPY pivots which would have still around 6 months to go till maturity. Some panic stop gap measures have been to put on 1 year accumulators to buy the USDJPY, and these have so far been KO-ed along the way. As a guide, a typical accumulator for 1 year at today’s pricing for monthly fixes would be as follows if we stretch it to as low a strike as possible:
Accumulate only at 92, KO-ed soon at 102.
2. BOJ rhetoric has stated loud and clear that they want a 2% inflation target. Below is a chart for CPI. Currently @ -0.7%. Just to put the size of the BOJ package in perspective, its almost as large as the current US Fed QE program, for an economy about one-third the size of the US economy.
3. How far can this go ? The last time when we saw inflation around the 2% level, USDJPY was around the 110 levels . Citi Technicals also calling for a similar type of move.
Good luck and happy trading.