Thoughts on USDJPY

Following on the same theme as our previous post on looking to get short GBPUSD on the current bounce, we expand on one of our themes, namely Dollar strength with a view to risks to the upside into Q4.

We would look to buy USDJPY (in addition to selling GBPUSD) to express this.

US 10year yields are looking at a potential break above 1.63%, which may correct the year long move lower in yields. This combined with the Bank of Japan taking a far more active role in the health of the Japanese banking sector (after many banks were left in trouble following their rate cut earlier this year – amongst other things) is in itself positive for both the Nikkei and USDJPY.

The September 21st FOMC meeting (which is currently pricing in a 20% chance for a hike) and the subsequent statement could add further upside stimulus to USDJPY. We feel December to be the most likely timing for a rate hike, as data for a September meeting rate hike, has not been strong enough. This combined with with US Elections, makes a September hike increasingly unlikely, and sets the market up for a December hike. The resultant effect on Japanese institutions could be to return to unhedged UST holdings, which again would help USDJPY.

Entry levels to bear in mind are around 101.50-102.00 (the bound of the recent move lower  on the 3rd of September) but we would look to build slowly into this position, as we have plenty of time on our side for this trade.

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