By eFXdata — Jan 15 - 01:00 PM
Synopsis:
Danske Bank highlights an attractive tactical opportunity to short USD/JPY, citing overextended USD strength, intervention risks, and relative rate dynamics favoring JPY upside.
Key Points:
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Overextended USD Rally:
- USD strength driven by tightening financial conditions and pro-growth policies is seen as overextended.
- Downside risks to the US cyclical growth outlook could trigger a USD setback.
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FX Intervention Risk:
- USD/JPY is nearing levels that could prompt FX intervention, capping near-term rallies.
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Relative Rate Expectations:
- Market pricing reflects minimal Fed cuts over the next two years, leaving room for further easing to be priced if US data weakens.
- In contrast, the BoJ is expected to hike rates in Q1, favoring JPY.
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Positioning and Risk Dynamics:
- Stretched long USD positioning amplifies the potential for a USD/JPY correction.
- Elevated USD real rates increase the potential for support to JPY in the event of hard-landing tail risks.
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Trade Outlook:
- While short USD/JPY carries negative carry-to-risk, it is viewed as tactically attractive given current levels and expected rate movements.
Conclusion:
Danske Bank recommends shorting USD/JPY spot, capitalizing on stretched USD positioning, potential FX intervention, and supportive relative rate dynamics for JPY.
Source:
Danske Research/Market Commentary