A Yen to Sell Dollar Yen

January 7th, 2016 10:18 am | by John Jansen |

Via TDSecurities:

TD Securities

USDJPY:  End of the Line

§ After a rally spanning over three years, we think the next sustained move for USDJPY will be lower. We think the June 2015 high should hold as the last year’s narrow range breaks down. Indeed, with USDJPY sharply lower in recent days, this process may already be underway. Sell USDJPY for an initial target of 116.18 with room for extension to the 110 area.

§ We also see value in implementing strategic short cross-yen positions against a portfolio of AUD (target: 74.50) , NZD (target: 72.00), CAD (target: 80.00), and GBP (target: 164.00) as local factors will keep these currencies under pressure for the foreseeable future. As these crosses have seen rapid declines, however, we prefer to enter these positions on temporary rallies.

§ We do not think there is much appetite from BoJ officials to ease further as operational constraints bite and the focus shifts to fiscal policy for stimulus.

§ Cyclical deflationary forces in Japan are abating aided by a positive terms of trade shock and firm business sentiment. Paired with our expectation for a pickup in the global trade cycle, GDP growth should firm to further support wages and broader inflation.

§ As Japan’s current account has returned to surplus, portfolio flows may also be at a critical turning point.  Pension reallocation looks to be largely complete (diminishing outflow pressure) and repatriation may ensue as the population ages, biasing the JPY higher. Note that the JPY isthe cheapest G10 currency on average. While valuations are not a timing tool, Japan’s more constructive  macro dynamics suggest limited JPY downside.

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