BNP Paribas Research discusses USD/JPY outlook, and notes that its recent decline looks likely to mirror EUR/USD upward price action in 2017 in terms of the correlations' breakdown with yields spreads, which points to the possibility of further USD/JPY weakness over the coming months.
"The breakdown in these correlations has raised the possibility that USDJPY could be on the verge of a structural break towards long-term equilibrium fair value, similar to the path of EURUSD over the past year
We think eurozone investors, seeking to reduce exposure to USD accumulated during the peak ECB quantitative easing (QE) years, played an important role in EURUSD’s rise," BNPP argues.
"We expect the move lower in USDJPY to be quite gradual. Still, if our view becomes increasingly consensus, we may see more periods of intensified hedging activity, which could see USDJPY decline towards 100 more quickly," BNPP adds.
To express this possibility, BNPP likes to remain positioned for CHF/JPY downside via an options structure throughout 2018 (expiry 23-Jan-19).