Goldman Says To Sell USDJPY: "Pain Trade Is Lower"

If this particular FX trade reco came from Tom Stolper, we would urge everyone to do the opposite with both hands and feet. However, it hasn't, and since it actually makes intuitive sense, we would urge readers to at least give it a cursory skim through.

From Goldman's Tony Song

Positioning For A USDJPY Move Lower

USDJPY has rallied 3.5% in 2 weeks on wide expectations that Abe will come into office on Dec 16 and force BOJ into aggressive monetary easing (target 2% inflation). Market as a result has seen one way demand for USDJPY higher options driving skew sharply higher to recent highs. The desk believes that there is significant risk in USDJPY in the next month given event risk (most notably Japan elections/BOJ meeting and US fiscal cliff), but the desk feel that with positions relatively stretched, holiday season looming and the long side of the equation almost solely dominated by short term spec guy that the PAIN TRADE is now likely USDJPY lower from here, at least much more so than what the vol curve currently indicates.
Idea: Sell 1x2 USDJPY Put Spread 82.20/81.20. Zero Cost. NY Cut. 21Dec Expiry. Spot Ref 82.20. 1BF max downside.
Strikes are chosen based on the concentration of stops below 81.50 (where we expect short term spec names to start throwing in the towel). This could happen if:
A). Abe loses election or backs off from his aggressive policy stance. (Latter more likely)
B). US gets further away from a resolution on fiscal cliff. (Baseline forecast is for a decision on Dec21 before which we will see plenty of volatility and headline risk)
C). Risk negative shocks in either Arab Springs, EU, China etc.
D). Headline shocks and choppy price action driving weary market participants into closing their books for the year and taking us to downside stops in a vicious cycle.
Obviously there is a big chance that USDJPY goes higher as well in which case the trade ends up flat. Entry levels are attractive (below) and this trade works well as an overlay to an existing long cash position which many people may have. Hope it’s helpful and feedback much appreciated.
1mth 25 delta $JPY puts trading very cheap vs. ATMs (which you’re selling)


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