Currency investors should consider buying USD/JPY via options
going into this week's BoJ meeting, advises Barclays Capital in its
weekly FX pick to clients.
"Our expectations for a further BoJ easing is a close call and
we believe scope for further yen weakness is limited due to
undervaluation, a decisive easing by the BoJ could put a sharp upward
pressure on USDJPY, at least in the short term. When the BoJ surprised
the markets with QQE2 last October, USDJPY rallied by more than 3 yen on
the day," Barclays projects.
From a technical perspective, Barclays becomes more bullish USD/JPY in the short term.
"Recent seller capitulation on the weekly plot was endorsed by last
week's positive close. Rising daily momentum further helps to confirm
recent resistance erosion. We are looking for an initial move towards
the 121.75 area. A break above 121.75 would signal higher. Our greater
targets are towards the 125.30/125.85 range highs," Barclays adds.
Hence, Barclays recommends buying a 1-week 1x1 USD/JPY call spread (with expiry on 2 Nov), with strikes at 121.75 and 125.30.
"This option
structure costs 0.31% with maximum payout of 4.02% and payout/loss ratio
of 12.0, offering an upside hedge in case of a decisive BoJ action.
For those
looking for cheaper structures, a 1-week RKO costs 0.24% for the same
strike and barrier. The maximum payout ratio is 15.75 although the risk
is much more aggressive easing by the BoJ," Barclays advises
