Japan is a major risk, so investors are recommended to buy options, Bank of America Merrill Lynch says. In a cross-asset report, the bank casts next year's big investment theme as essentially a battle between the Fed's Ben Bernanke and Mrs. Watanabe. "With so much investment flow predicated on QE-infinity, and the maintenance of zero interest rates, anything that disturbs the liquidity outlook is likely to increase volatility," Bank of America Merrill Lynch Global Research's chief strategist Michael Hartnett says. In that respect, the Achilles heel for liquidity-complacent investors could be if yen depreciation turns into a capital-flight rout that causes JGBs to spike. To hedge against a possible resurrection of volatility, he recommends buying three-month AUD/USD options and longer-dated EUR/USD options. AUD/USD is at 1.0528, USD/JPY is at 83.82 and EUR/USD is at 1.3080.
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