Currently viewing the tag: "USD/JPY"
View: Yen intervention provides buffer to run EM catch up theme, Europe the principle risk
We mentioned a couple of times last week that one way to profit from the improving risk backdrop was to look at some of the Emerging currencies, specifically the MXN, ZAR, PLN and some of the regional Asia crosses vs. the JPY. After this morning’s intervention from the BoJ (market chatter suggesting they sold JPY3trn) we’d be tempted to book profits or at least tighten up any trailing stops in the latter cross rates. While we thought the idea looked timely given JPY price action over the last few weeks, particularly when contrasted against the marked improvement in risk appetite (which is often JPY negative) and murmurings from Japanese officials, and the fundamental rationale for looking for stronger Asia currencies of course still stands, such swift gains are always worth booking. We’d also add that on recent occasions BoJ intervention has only happened on one day (in part to avoid the tag currency manipulator), it would be unusual for this to change in such close proximity to the G20.
Any proceeds could perhaps be used to provide a cushion for playing the broader EM FX catch up theme into the end of the year or at least create some insulation against the data flow this week (US specifically) which looks to be behind some of the profit taking we’ve seen early on Monday. We think the calendar could be key in determining whether the market can actually buy into the idea US soft patch is over in a lasting fashion and as such maintain bullish momentum in the market overall. The Chicago Purchasing Managers survey and ISM releases will be more important than usual in our view, perhaps eclipsing the jobs reports if they comfortably beat consensus (we’re still somewhat sceptical of this but that has been the recent bias) and of course on top of this we have the Fed meeting, although we don’t expect any surprises from this.
Risk as ever still emanates from Europe, periphery bonds continue to trade badly reflecting a clear lack of conviction in the much hyped ‘solution’. It was quite a straight forward process to pick the plan to pieces so this isn’t particularly surprising. We prefer playing risks here by positioning against the euro, a EUR/USD1.4000+ handle just doesn’t seem to do justice to the plethora of risks at work across the block. We still like short bunds too, technical picture still pointing to higher levels, this stands while cash yields hold above 1.96%.
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View: Still early days for the EUR decline, dollar index has ample space to extend gains m/t
Markets are playing out very much as we expected. The euro has come under increasing pressure amid fears politicans are still ill-equipped to deal with the debt crisis and specifically a Greek default (something we’ve long thought inevitable). Policy makers across the region seem united that something decisive needs to be done to firewall Greece (and Portugal and Ireland). Unfortunately the prescription as to how to actually do this still varies radically from country to country making a consensus difficult to forge. There are plenty of other spanners in the works too, such as the German constitutional court and election/parliamentary risks (shrinking government majorities) across the block.
It’s fairly straightforward to argue that by European standards the steps taken thus far have been radical and will be the precursor for more reforms/integration across the single currency block going forward; but this is all rather meaningless if the German’s are not willing to fold their austerity card and back up the EFSF with more sizeable amounts of tax payers cash and the other dissenters fall into line. While markets remain stuck in the current vacuum the risk of an uncontainable event is ever present which should of course keep pressure on the single currency and the region’s financial markets.
Our EUR view has been bearish for some time and we still believe there are substantial downside risks even after the decline we’ve seen since the September ECB meeting which to us was the trigger to sell (http://wp.me/p1G1Fr-cc). EUR/USD1.3000 is the next psychological draw but looking at the longer-term charts an eventual drop back towards the base of the down channel from the 2008 highs does not look unreasonable. This comes in at 1.1340 currently. It’s worth noting that since inception the average rate of EUR/USD has been around 1.2750 and if working on the pre-financial crisis era levels are more like 1.1700.
Looking at the other crosses we also expressed a preference for short CHF positions, specifically against the dollar – our idea being this was effectively a carry neutral EUR/USD with a sweetener thanks to SNB’s EUR/CHF currency floor and its view that the CHF should weaken against the euro over time (http://wp.me/p1G1Fr-bU).
Our EUR/USD view fits well with our expectations for more prolonged gains in the dollar index (DXY). Price action here has played out as we expected. Not only should the dollar gain from broader risk aversion, stemming not just from eurozone fears but broader growth risks including a stagnating US and volatility emanating out of emerging markets recently. Fed policy has also turned more supportive, specifically the decision to ‘Twist’ rather than embark on another futile round of quantitative easing, the benefits of QE2 becoming more dubious by the day. DXY has yet to hit our first objective of 80.00 – although it’s not too far now – with the higher targets of 82.59/83.55 what we’re really aiming for and even those 2008/2010 highs above 88.70 are not that fanciful if US recession risks become clearer (http://wp.me/p1G1Fr-cj).
With this in mind we’d keep a close eye on this week’s September non-farm payrolls. The market is looking for a 50k gain up from flat in August. A good number (100k plus) could trigger a short-term shakeout of dollar longs as the market looks a little stretched on a daily basis, but we’d view such a pullback as an opportunity to add to USD exposure. Ultimately economic conditions will remain challenging both in the US and outside and stock market volatility will persist all of which should underpin the dollar’s recovery.
Lastly we take a quick look at the JPY. While the Japanese unit has hit decade/record highs vs. the Euro vs. the dollar the cross has been flat lining of late. JPY bulls will not that this is despite modest efforts from the Japanese to increase funds available for currency intervention – a policy that has been deployed rather ineffectively thus far. We’d certainly not hold out much hope of the JPY weakening up against the EUR but risks in USD/JPY look better balanced. A more aggressive unwind of risk should see the USD outperform, simply for the fact that the yen is no longer the funding currency of choice among global investors, that crown now falls to the dollar. It’s probably worth looking back at those big risk off moves in emerging markets earlier in the noughties and the impact this had on the JPY to get a sense of what could happen to the USD against some of the EM crosses. Of course we have already seen some large moves already here, but the potential is far greater.
Sterling we will cover in more depth later in the week but Hades view remains negative as per our last update (http://wp.me/p1G1Fr-d2).
