Is The Yen Broken?

A market-forensic follow up on JPY's insanity over the past 24 hours, what it means (and what it doesn't), and what's ahead.

Yesterday, I posted the article below:

Here is what had transpired thereafter:

That’s USDJPY with a single day trading range from 147 down into the 141 handle, and at one point seeing JPY surging over +2% on $1.4bn notional volume traded within a span of 90 seconds - then whipsawing back down again in a spectacular blow off top.

And THAT is the type of violent volatility can both be caused by, and cause the systematic accounts to trigger automatic liquidations on various other futures positions. For now, it seems that Japan equities were evidently the standout victim.

Though of course it makes sense why, it still is quite unusual to see such isolated behavior among otherwise uniform DM equity indices, particularly in 2023 which had been led by Japan:

Yen CME Futures & Options

Indeed this was driven by options on JPY futures contracts - which is why I said to ignore the spot USDJPY price itself, and watch specific strike price levels on futures instead.

Here’s the chart I sent out at the time, marking the key strike prices where there were significant sized open interest on (then) out-of-money call options for last trade date on Friday 12/8 (today)

First smaller sized level of 0.00685 was cleared shortly thereafter, and then went straight to the next of 2 large sized strike prices at 0.0069:

…which acted as a temporary level of resistance for a point of pause in the JPY upside rally, as what tends to happen with large options open interest levels due to delta hedging activity (as well as separate limit orders).

0.0069 was then cleared to the upside as well, and then became a support level, as the next strike price level 0.006925 became the next (temporary) resistance cap..

…and once 0.006925, the last of the key strike price levels I had flagged was also cleared - then JPY broke out on volume:

…and then REALLY broke out on serious volume:

…and that’s the market mechanics of how and why this happens:

So again - for the market setup at this moment, focusing on spot USDJPY levels and price action is the wrong metric, because spot USDJPY is being driven and whipped around at the hands of the listed derivatives market activity.

Options on JPY Futures

Huge spike in trading volume on options on JPY futures - last time such levels were seen was Nov 17th, when these 2 (then) OTM calls on JPY were suddenly opened.

27.5k options contracts traded on CME for Thursday, about 5x the average daily trading volume amount, 23.5k of which were call options (less than 4,000 put options traded yesterday).

And among the 23.5k JPY call options were traded, by the end of the day, a net -9,500 open positions on calls were closed out, while puts added a net +750 contracts of open interest.

And we can probably guess which specific call option strike prices had not only been the predominant active ones trading, but also had been exited: the aforementioned and flagged, massive outstanding open interest at 0.0069 and 0.006925 strikes for 12/6/2023 expiry, now in the money:

Important to note that the full/remaining position (0.0069 Calls x10,000 & 0.006925 Calls x8,800) was NOT closed out yesterday - a little more than half of the open interest remains open as of Chicago market close.

As I mentioned in my note yesterday - I had been following this position ever since it suddenly came into existence, and thereby on my radar on Nov 17th. And not just because of how outsized it was, but because of what the trade itself was: a bet that USDJPY, which had been in an upward trend and hovered above/around 150, would sharply reverse course and plummet down to the mid~low 140s by the first week of December (within 15 trading days), levels not seen since pre July BOJ’s shock YCC-C rollout.

CME data from 11/17/2023

An incredibly aggressive bet to say the least. What’s more incredible however, is that it actually worked out quite well, and just barely in time. Almost as if it worked out a bit too well… and this has actually been a recurring theme with this trade - more on that below.

Either way, as I said in my note yesterday- this was a single trade/trader who originally opened the position.

There are a few reasons why that matters, and most of it would be based on layers of pure speculation and therefore to be taken with many grains of salt, but primarily - it matters in order to try and play out what the potential immediate term market implications may be.

Notably, is the insane volatility that we saw in the last 24 hours now over?

There is still half the open interest remaining, and if we get a move (or movement) that’s even half of what we saw yesterday, I would imagine that the combined 2 day JPY surge may very well be enough to trigger the sustained, self-feeding JPY short cover snowballing akin to the likes of what we saw with the October 2022 yentervention trigger that subsequently took USDJPY from 151 down to 125 in 3 months.

450k futures contracts traded for the day:

Which is more than 3x its average daily volume, and an amount that is only rivaled by record-setting days of anomalous events - such as acts of Japan yentervention:

Which is significant, because the screenshot above from October 2022’s yentervention #2 of 2 by the Japan Ministry of Finance triggered the enormous JPY short squeeze, which then catalyzed a prolonged period of short covering, not just in JPY, but USTs and various other markets -

Yentervention: World’s Only Defense Against The All-Mighty Dollar

The current market setup and positioning look similar enough to have to consider a potential repeat move - and this is why the particulars of market dynamics matter now.

October 2022: Japan yentervention had short squeezed JPY futures, leading to a sustained JPY short cover for -15% USDJPY in 2 months. Current setup is remarkably similar.

So, at what point does JPY short covering beget short covering, in a self-fulfilling manner? Nobody knows, certainly not me - but I can say that it’ll be JPY futures +4% single day moves on volume (forced exiting) that’ll get us there.

Mystery Options Trader

Although the CME data shows that there is still about half of the open interest still remaining, it doesn’t necessarily mean it’s the same original trader’s position.

Yesterday’s trading volumes on both of those call options contracts more or less equated to the existing open interest:

In other words, that trader could very well have gotten out of the trade completely, and these are new traders entering the trade. OR, the remaining open interest is indeed that of the original trader - and anything in between.

And the reason THAT matters is- potential execution style.

Just pure dart-throwing speculation on my part - but let’s say, IF our trader had blocked traded 4,000 lots of (now) 80 delta in the money calls dumped off to some market-maker’s trade desk, then that MIGHT explain the hyper-erratic final spike / slingshot reversal, as parties need to delta hedge immediately on-screen and at-market.

If you follow how this trader seems to “reduce position size” (take profit) - again, it seems very much well-timed.

Nov 17th: Opens trade with 2 far-out-the-money calls in huge size for relatively short-dated expiry. i.e. the trader needs the yen to rally far and fast, when its only been falling.

But when the trader opens the trade on 11/17, that puts bottom in JPY, and then reverses, and begins to quickly and sharply move higher (chart below, green box)

3 trading days later on Nov 21, at which point JPY is +3% higher, trader cuts a total -5k calls from the position- profit taking. And JPY immediately falls thereafter (chart below, red box)

And then yesterday happened - both call strikes now in the money, but position size reduced by approximately -9k contracts again. Either a phenomenal market timer, or is pushing/moving listed derivatives markets using dealers’ delta hedging dynamics in its favor, or something else.

Whatever it is, its stemming from the futures market, and therefore can trigger a sustained move in JPY strength (USD weakness), and US yields down by as much as another -50bps, -100bps.

So, what does that now do for the Fed’s “bond market is doing the tightening for us” - is that now no more?

---

But perhaps the most important reason I am conveying all of these options on futures trading related detail is something I mentioned at the end of one of my follow up notes on substack yesterday, as all of this was going on. Sorry, I don’t know how or when to use these “notes” yet - but see the message below - particularly what I’ve emphasized in bold.

Wow.. quite a move. JPY futures find some upside resistance at each of those large strike prices (again, spot USDJPY levels aren’t the relevant measure at the moment), which were subsequently cleared. Then, after having already made a +1% move, JPY jumps another +2% in under 2 minutes on ~$1.4bn notional. So it does now seem that those 2 massive options positions have largely been closed out based on their respective trading volumes on the day. But- there is still a TON of net short futures positioning by both asset managers and leveraged traders who may very well get the risk officer shoulder tap, or the margin call. In terms of cross asset spillover, DM indices are holding up fine (for now) while NKY futures are getting slaughtered.
Last point before I (probably) go to sleep is- if you look back at my original post flagging this, ad my subsequent follow ups, not once do I mention the BOJ “neg rates gone in Dec” story making the rounds now. Not because that’s not a real thing, but just to point out that should there be an extreme JPY move, it’s due to pre-positioning. Not BOJ chatter headlines. Sometimes it is BOJ chatter that will move markets. Today was not- it was market mechanics already in play, hence the post.

If you’re interested in intraday market notes (of significance only, not nonsense x quantity) - subscribe, and let me know with your feedback. Thanks as always - and keep eyes on JPY westonnakamura.substack.com/p/heads-up-…

The yen’s incredible move over the last day or 2 has very little (if anything) to do with Bank of Japan’s newest press testing campaign on ending negative rates come the Dec BOJ meeting. This was market mechanics at work- the outsized pre-positioning, the dealer hedging behavior, the instruments and their respective price levels that matter- all of which is why I went through all this painstaking detail to lay out above, which is why it was “predictable” (played out the way in which it did) in my note.

But, market participants by and large believe this is BOJ’s removal of negative rates in December getting priced in. Long before the past 24 hours, I had already been 70/30 on negative rates to be gone in December - and for the moment, I still believe it will happen at the December BOJ meeting.

And that said, virtually none of yesterday’s JPY move was a BOJ neg-rate-repricing move- it was a major options open interest getting slammed into the money just prior to expiry. But market participants (and perhaps BOJ themselves) will think this JPY rally is about negative rates in play - in fact, it may even be impacting their decision making process on negative rate policy. Which is fine, if markets were indeed reflecting a preliminary reaction and repricing to some BOJ/Nikkei press test headline of ridding the negative policy rate - but the market move was from a 2 week old options position.

So, although I will obviously have to revisit the market setup at the time (and I most certainly will), it seems that due to such a large mass of market participants misreading and misattributing the yen move to Gov Ueda commentary and “intent” on negative rate removal for December BOJ, further reinforced by the the fin press - AND, seemingly nobody else who has noticed this massive and market moving call options position - that may be a very interesting and short term tradable combination. In which, negative rate removal is NOT priced in. Or, if your Dec BOJ view is for no change to policy, there may not be a “big reversal” for JPY to re-price weaker - there may not be any move at all.

I will surely be monitoring these positions and the broader (actual) market moving dynamics currently at work- and will also as always, think about what the trade is (and execute said trade of course).

Which brings me to the perfect segue for the last line of my substack note above:

If you’re interested in intraday market notes (of significance only, not NONSENSE x QUANTITY) - subscribe, and let me know with your feedback. Thanks as always - and keep eyes on JPY

Yes, I do deep dives and share big picture analysis. But at the end of the day, I’m a markets person (and for better or worse, a unique one in how my mind works). Any traders/investors out there interested in short form intraday market notes (actual ones, not spam) - please consider subscribing, and then give me your thoughts and feedback as to what you would like to see and receive from me.

So that things like the below don’t even have to be read, because you’ll hopefully and likely already know.

I spend a lot of time (probably too much) simply skimming and sifting through various financial media outlets and publications, just to see what market explanations exist out there- and more importantly, what is NOT being addressed. It's incredible just how much is missed, overlooked, or simply incorrect.
Across The Spread is not “news” - I provide original analysis and insight (for better or worse). That said, yesterday’s note was neither insight nor analysis - it was literally titled “Heads Up: Potential JPY Surge In The Immediate” and pointed to the options market as the reason for what may be about to occur in markets. And nothing about Bank of Japan’s press testing story of negative rates.
Compare that to financial media outlets with their endless resources, who perpetuate an incorrect market “story,” AFTER the fact.

Green and red blinking tickers: what objectively moves them, how do we know, and what can we do with that info. This is what is at the core of Across The Spread. So, if faced with discussing what matters more/most: BOJ vs green & red blinking tickers (markets), the latter will always win, and the JPY notes from this week are perfect examples of that. BOJ will only matter if and when it matters for green & red blinking tickers and it so often does that I talk about BOJ often, but not always.

Thanks for your vote of confidence.