Bank of America Merrill Lynch Research prefers considering hedging trades via long JPY exposure against the USD and EUR. BofAML runs a short EUR/JPY* with a stop at 126.
"The US-China trade negotiations will become more intense as the end-February deadline approaches and investors should not take a deal for granted. Another extension could be market negative. Although not a trade war, it will prolong the uncertainty.
By the end of March the UK and the EU need a Brexit deal or an extension of Article 50, and they are still far from an agreement. Even if these risks do not materialize, markets could get more concerned as these deadlines approach. And there is always a risk that we may not get a deal in all of these cases. We have been optimistic that logic will prevail, but it now seems to us that the consensus has become too positive and may be time to hedge," BofAML notes.
"It is time to go long JPY again. Short USDJPY and short EURJPY were two of our top year ahead trades. Both trades did very well during the market sell-off in late December and early January, but JPY weakened again during the risk-on in recent weeks. If we see a market correction in the weeks again, JPY should appreciate again. Eurozone data remains weak and the short-term risks will keep the Fed dovish for now," BofAML argues.
*Recorded in eFXplus Orders