USD/JPY has broken below 110, and our technical analysts believe a test of 106 could be in the cards in the near term. It is certainly too early to return to selling the JPY, and it is even more doubtful that a weakening of the currency would be led by BoJ action. A direct intervention is unlikely to be successful, given the recent loss of credibility of the central bank and a JPY that remains undervalued in real terms. Also, such an intervention would probably be opposed by the US, Europe and China.
A more hawkish Fed would turn up the USD/JPY decisively The catalyst for USD/JPY upside would likely be a change in the Fed’s stance (less dovish sfbeebtFI Daily). Such a shift is around the corner if financial conditions continue to ease fast. That would support the USD and most likely hurt financial conditions. This is a major threat to markets that are still risk-friendly, and one which would not benefit the JPY. Another very distinct possibility is that the rally in risk assets will end on its own, without any particular policy or event trigger.
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Buy USD/JPY forward topside - Buy USD/JPY 3m call, strike 115, Sell 2m call, strike 115 (equal weights) Indicative offer: 0.20% (vs 0.47% for the call strike 115, spot ref: 109.30)
Trade risks: USD/JPY above 115 in two months. The risk of the calendar call structure is limited to the premium paid up to two months. Beyond this date, investors could face unlimited topside risk if USD/JPY trades above the 115 strike at the 2m intermediate expiry but below it at the 3m final expiry: the long call would be out of the money, realising the loss supported one month earlier on the short call.