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Jan 15 - 02:55 PM

Danske: An Attractive Tactical Case for Short USD/JPY

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:

  1. 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.
  2. FX Intervention Risk:

    • USD/JPY is nearing levels that could prompt FX intervention, capping near-term rallies.
  3. 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.
  4. 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.
  5. 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

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