MUFG Research discusses the JPY outlook in light of today's big decline on the back of the building concerns over the new COVID variant.
"The reports of a new COVID strain that could be much more transmissible and possibly more lethal is driving FX moves this morning – this is the first morning we can remember in quite some time when COVID has had such a clear impact across all markets. What is notable in FX today is the outperformance of the Japanese yen," MUFG notes.
"Our z-score measure of positioning for JPY amongst Leveraged Funds shows the most stretched short position since 2015. That was when USD/JPY was trading above 125.00 and was just ahead of the notable drop in 2016. On a closing basis, if USD/JPY closes below 114.35, it will be the largest one day decline so far in 2021 and could well stir investors who likely remain substantially short JPY," MUFG adds.