A dicey short-term FX trade
Will this currency finally outperform after the latest monetary policy decisions?
This is a short motivation for what will likely be a short-term FX trade:
short the US dollar and short the Japanese yen.
1. The catalyst: Japan’s Vice Finance Minister
Vice Finance Minister for International Affairs Kanda told reporters, ‘The current weakening of the yen is not in line with fundamentals and is clearly driven by speculation.’ He added, ‘We will take appropriate action against excessive fluctuations without ruling out any options.’
Last year, the Finance Department intervened through the Bank of Japan several times. The weakest level at which it did was at USDJPY 151.95. At 151.44, we are not from that.
2. The differentials
The Federal Reserve kept its forecast of three rate cuts for this year. Powell & Co. need little reason to cut what the Chairman calls very restrictive rates. As the Bank of Japan will not or only marginally hike its policy rate from here, the interest rate differential can only go one way.
In addition, with inflation turning back to levels seen as normal, even though significantly above their average of the last twenty years, the difference between US and Japanese inflation expectations suggests a stronger yen.
3. China to the rescue
Somewhat surprisingly, the Chinese Yuan has weakened in recent weeks. With foreign direct investment down the drain and an ongoing real estate recession, China needs a stable currency, at least not a weaker one. The chart below shows that the correlation between the Yuan and Yen is pretty high.
4. Positioning
Futures positioning in the yen remains extremely short. Short squeezes can make an allocation bet ‘juicy.’
But
There are two things to keep in mind that ask for a tight stop loss at USDJPY 153. First, the 200-day moving average at 146.7 is the first point of resistance, 3% below the current level.
Second, investors expecting a massive revaluation of the yen because of the theoretical end of extremely loose monetary policy, which remains very loose, have been fooled time and time again, and the chart below confirms this.
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