Synopsis:

Danske maintains a bullish bias on JPY, with USD/JPY near YTD lows (~149), driven by narrowing rate differentials and safe-haven demand. However, the long JPY trade is becoming crowded, raising risks of a positioning squeeze.

Key Points:

1️⃣ Narrowing Rate Differentials Support JPY Strength 📉

• The 2-year US-Japan yield spread has tightened to ~3.3pp, its lowest since October.
• This suggests further downside for USD/JPY, reinforcing JPY’s outperformance this year.

2️⃣ Safe-Haven Demand & Oil Prices Add to JPY Strength ⚡

• G10 FX lacks clear direction amid policy uncertainty, making the JPY’s safe-haven status more appealing.
• Falling oil prices also benefit JPY, as Japan is a net energy importer.

3️⃣ Risk: Long JPY Trade is Becoming Crowded 🚨

• IMM data shows increasingly stretched long JPY positioning.
• A sharp reversal in sentiment could trigger a short-term USD/JPY bounce.

Conclusion:

While JPY remains fundamentally supported, overcrowding in long positions raises near-term risks of a positioning-driven USD/JPY rebound. The broader trend still favors further JPY strength, but investors should watch for short-term squeezes.