Jan 18. Strong bid in UST implied vol. Japan’s free ride is coming to an end.
–The new year’s bond rally finally sputtered, with the ten year note yield rising 3.6 bps to just over 181. In TYH, 13 of the past 14 sessions prior to Friday had a higher close (since late December), making a pullback overdue. In spite of the price correction, implied vol in treasuries remains extremely well bid going into this week’s ECB meeting. As an example, one week ago Friday I marked TYH 128.5 straddle at 1’63 with six weeks until expiry. On Friday the 130 straddle settled 2’11, even though a week of time value vanished. In the five year note, the bid is even more pronounced. One week ago FVH 120^ settled 1’08, and on Friday the 120.75^ settled 1’17. In Blue March euro$ midcurve, the 9775^ was 35, the 9800^ on Friday settled 37.5. Volatility across all markets has increased, and of course the ECB meeting looms on Thursday with the Greek election following.
–There has been a good size seller of TYH 128.5/131.5 strangles last week, with open interest in both strikes up over 15k on Friday, strangle settled at 1’00. The upper strike is 1’20.5 away from Friday’s settle, or approx 20 bps away, while the put is 1’11.5 away, or 17 bps. Roughly yields at the strikes of 1.98 to 1.61.
–Since last October, EUR/JPY has done a round trip, starting at around 135, rallying to 149.50 in December, and now back to 136. Of course, in late 2012 it was only 100. The success of Japan’s depreciation has helped it gain export share and of course boosted the Nikkei. However, with the ECB intent on using the same technique to weaken the euro, coupled with the shaken faith in Central Banks after the Swiss decision, the free ride for Japan is coming to an end. No matter whether the ECB’s QE is large or small, it will be hard for the euro to rally. For me, the only conclusion is to sell the Nikkei on any type of a bounce. THIS IS NOT A RECOMMENDATION for you… just something that I am going to do. There’s a double top around 18000, and just above 18000 is the old high from 2007. It closed last week at 16864. Remember, trading has RISKS, unless you have an inside line to the SNB or ECB. I wouldn’t want to remain short if Nikkei closed above 18,000.
