FX traders of the world have been forlorn for a week or two as the lack of directional guidance from the anti-guru-du-jour Thomas Stolper of Goldman has been sorely lacking. Worry no more. He is back with with his latest ‘Fadance’ (/fey-dyns, verb/ – “Advice” which Goldman Sachs provides to “muppets”) in that he prefers to be short USDJPY from 82.8 (suggesting JPY strength on the back of seasonal patterns and the recent deterioration in the trade balance as being transitorytemporary). Given his recent track record, being long the USD against the JPY would seem appropriate and his stop (and therefore the target) at around 84.5.
Trade Update: Go short $/JPY on the potential reversal of recent JPY-negative factors
As we have been pointing out for some time, there is a substantial risk that the sharp move in the JPY will reverse at least partially in the new fiscal year. Seasonal patterns point in that direction. In addition, we have also highlighted that the recent deterioration in the trade balance was likely driven by temporary factors, and our Japanese economists expect the current account balance to remain in surplus in the next few years.
The surprise improvement in the February trade balance in Japan supports our view and we are now also coming very close to fiscal year-end in Japan. This news comes against the backdrop of substantial speculative short Yen positions, according to our Sentiment Index and IMM data. Unwinding of these positions could therefore be an important driver of $/JPY weakness.
The perception after the February BoJ meeting was that the bank was changing its stance, another important factor for the Yen. The central bank sounded more committed to achieving a re-defined 1% inflation target and in a more front-loaded manner, so we do believe that some real shift has occurred. That meeting also coincided with the beginning of the sharp Yen sell-off. However, the subsequent March meeting failed to follow up with additional easing measures, which led to some re-assessment by markets of the extent of the change in BoJ policy.
In contrast, we continue to expect QE3 by the Fed, which would suggest that the Fed remains more dovish than the BoJ. Monetary policy differentials therefore imply the recent move in $/JPY was too large. This is also visible in the correlation with rate differentials, where USD/JPY appears to have substantially overshot the moves in rate markets.
We would recommend investors go short $/JPY at current levels of 82.80 for a target of 79 with a stop on a close above 84.50.