A cheap vol bet (yeah, right)?

It looked for a moment like there might be a flash crash yesterday, as Spooz dropped an almost unbelievable 14 handles in a matter of minutes after the open, representing something like an 8 standard deviation move by the standards of recent history.  (Before you complain about Macro Man's shoddy math, that number was completely made up.)

Yesterday's core PCE deflator data ratcheted up in line with expectations to 1.5%, which is still below the Fed's ostensible (and frankly unrealistic, based on the last 15 years) target of 2%.   Still, it was a step in the right direction, and a higher-frequency analysis clearly shows an uptick in the recent prints, as the 3m/3m annualized chart below indicates.

Still, before we get too excited it's worth noting that even this higher frequency reading is still below 2%, let alone the y/y changes tracked by the Fed.  As an historical precedent, this measure was 2.4% when the Fed embarked on its previous tightening cycle, having breached 2% only a couple of months previously after the deflation scare of 2002-03.  Macro Man would suggest that you'd need to this measure make a "higher high" than that observed in late 2011 for the Fed to feel comfortable about the inflation situation.

Elsewhere, Shinzo Abe no doubt poured himself a nice sake after Japan's labour market data posted its best reading in nearly a generation last night.  At 3.5%, the unemployment rate registered its lowest reading since 1997 (pictured below), while the jobs-to-applicants ratio printed its highest reading since 1992.  Regardless of the long term efficacy of Abenomics, you have to give the man credit for trying something new to make a difference, because in the short run, at least, it has.

What it means for the yen is a trifle unclear.   In the old school world, good domestic data tended to be bad for the yen, as it signaled increased risk appetite amongst domestic investors, which usually resulted in yen selling for overseas punts investments.   In the brave new world of QE and financial repression, however, good news can be seen as bad news insofar as it takes away the central bank sugar bowl (or crack pipe, or heroin needle, etc....)  Certainly it is hard to see the BOJ re-entering the equation any time soon with data like this.  Indeed, it's probably no coincidence that Kuroda and co. are shortening the duration of their rinban BOJ purchases.

It would seem, therefore, that there might be a bit of pressure for the yen to strengthen, at least absent a hawkish out turn from the US.  Interestingly, USD/JPY is on quite an important level on the weekly ichimoku charts (see below.)  Now, this charting technique involves a lot of mumbo-jumbo that Macro Man once tried to figured out in its entirety but gave up on.  It is widely believed, however, that the Japanese love these charts, so you often see gaijin consulting them to get an insight into the locals' likely mindset on Japanese asset prices.   As you can see, the weekly yen chart is threatening to break into "the cloud" for the first time since the Abenomics trade really got going in late 2012.

In theory, USD/JPY should either bounce sharply from this level or crash down to at least the bottom of the cloud, which currently resides at 96.14.  Either way, the theory goes, USD/JPY could be due for a recent range-breaking move in short order.

And yet here we are with 1 month USD/JPY vol at all time lows, on a 4 handle!  The one month straddle should retail for roughly 120 USD/JPY pips, which does not seem particularly cheap given the exceptionally low realized vol of the last few months but does look quite a bit better when you consider the inchimoku level noted above.  Indeed, Macro Man has had reasonable success over the years taking long vol punts on assets that rest on critical technical levels, particularly those with at least some fundamental justification to move.  With the 2 week straddle priced at roughly 70 pips, you can still recoup more than half your money even if nothing happens over the next couple of weeks (including any gamma scalping.)

It's hard to get excited about buying vol in the depths of summer with the business end of the World Cup about to start...but as potentially asymmetric bets go, this doesn't look like a bad one.