The break of USDJPY above 110 and EURJPY almost reaching 125 is likely to be the start of a new appreciation trend for these pairs, says BNP Paribas.
"Our economists’ base case remains that the BoJ will cut the IOER further into negative territory at its June meeting.However, they note that in light of recent developments, the probability of a move as early as next week has risen considerably. BNP Paribas FX Positioning Analysis continues to highlight that the market holds a net short EURJPY exposure and STEER™ signals that EURJPY is trading well below its short-term implied fair value of 128.74.
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In addition, we attribute part of the appreciation of the JPY this month to rising hedge ratios on Japanese investors’ foreign assets. This provides plenty of scope for the JPY to weaken if these hedges are unwound as expectations for ongoing JPY depreciation rebuild,"BNPP argues.
In its portfolio, BNPP holds long EURJPY exposure via a call spread, but notes that short JPY via spot appears increasingly attractive heading into next week’s meeting.