Synopsis:

Danske Bank maintains a strategic bearish outlook on USD/JPY over the medium to long term due to several factors that suggest a cooling of the U.S. economy and a potential peak in yields. Despite this, the bank remains on the sideline in the near term, citing the currency's recent unexpected rise and the complexity of current market dynamics.

Key Points:

• US Labor and Yield Shifts: The U.S. October jobs report and declining long-term yields hint at a cooling labor market and growing economic uncertainties, which traditionally could bolster the JPY.

• Oil Prices and JPY Carry Trades: Lower oil prices should theoretically support the JPY, but the carry trade, with its significant interest rate differential between Japan and the U.S., continues to attract investors towards the USD.

• Intervention Risks: Japan's Ministry of Finance has signaled readiness to intervene in the currency market to support the JPY, but market trust in these interventions is waning due to perceived inaction, even as the USD/JPY approaches potential intervention levels.

Conclusion:

While Danske Bank sees potential for JPY appreciation in the longer term, driven by changes in yield differentials, they are not actively positioning for this trend in the immediate future. The bank suggests a strategy of selling on rallies due to the current lack of convincing market signals for a sustained reversal in USD/JPY's upward trajectory.