We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Mixed
Gold
Mixed
Oil - US Crude
Bullish
Bitcoin
Bearish
More View more
Notice

DailyFX PLUS Content Now Available Freely to all DailyFX Users

Real Time News
  • Indices Update: As of 18:00, these are your best and worst performers based on the London trading schedule: France 40: -0.26% US 500: -0.33% Wall Street: -0.35% Germany 30: -0.37% View the performance of all markets via https://www.dailyfx.com/forex-rates#indices https://t.co/eDYtqwsUTc
  • Nebraska Department of Agriculture says China agriculture delegation cancels US farm visit to Nebraska according to RTRS #Tradewar $SPX
  • New Montana tourism campaign slogan: 'Visit Montana or the markets will drop. It's Time.' https://t.co/HemCbRKFIP
  • The MSCI #EmergingMarkets index down to session lows, covering the upside gap attained at Friday's market open as risk aversion engulfs financial markets in the wake of China's delegation team cancelling a farm trip to Montana. Will this bode ill for ongoing talks? #TradeWars https://t.co/AfeI8sL1mx
  • Anti-fiat #Gold prices at session highs as US government bond yields tumble following Chinese delegation team canceling farm trip in Montana #TradeWars https://t.co/byTaNE763d
  • 🇺🇸 (USD) Baker Hughes U.S. Rig Count (SEP 20), Actual: 868 Expected: 881 Previous: 886 https://www.dailyfx.com/calendar?utm_source=Twitter&utm_medium=TweetRobot&utm_campaign=twr
  • Big move on $SPX this afternoon on news that China trade officials have cancelled Montana visit https://t.co/rm6nZrFCbK
  • Sentiment deteriorating after Reuters report that the China delegation team cancels a visit to a farm in Montana, with officials set to return back to China sooner. #SP500, #AUDUSD, #NZDUSD and #USDJPY hitting session lows https://t.co/2du2JORtZ8
  • #Gold prices are in consolidation just below long-term trend resistance. Get your $gld technical analysis from @MBForex here:https://t.co/e0dOvLqpaY $XAUUSD https://t.co/Q7LFeIOWD2
  • RT @SkyNews: Brexit: Leaked document says UK proposal fails to solve backstop issues https://t.co/zpUcy0sDOI
Trading Opportunities of 2016: Yen Will Break Complacency and BoJ Force

Trading Opportunities of 2016: Yen Will Break Complacency and BoJ Force

2015-12-29 17:00:00
John Kicklighter, Chief Currency Strategist
Share:

The Yen crosses – like developed economies’ equities – have stretched the boundaries of traditional valuation. It is not uncommon in the markets to see something move above or below what would be loosely considered fair value, even significantly. However, years of appreciation for both of these markets has seen an exceptional gulf open to comfortable fundamental levels. One of the most basic FX measures is illustrated in the graph below. For decades, Japan’s underlying rates have hovered around zero. In turn, the appeal of cheap funds has endowed the currency a ‘funding’ status for the carry trade. When risk appetite rises, investors in the FX space will look to collect the yield in carry and the Yen was among the most common facilitators of the trade (a fancy way of saying it was frequently on the short side of these types of positions). Yet, as USDJPY and other Yen cross exchange rates continued to rise, the expected return (carry) held to exceptionally low levels.

Trading Opportunities of 2016: Yen Will Break Complacency and BoJ Force

Chart Created by John Kicklighter using Data from Bloomberg and FXCM’s Tradestation Desktop

The gap between the expected income from the Yen crosses and their prevailing market price was bolstered by the BoJ’s monetary policy approach (QE) devaluing the currency and by an exceptional appetite for risk that made even these tepid returns a speculative target.

It is difficult to maintain such a wide divergence in price and value. If the disparity closes, it is unlikely that returns will be the leg closing the chasm as that would insinuate massive rate increases from carry currencies. Therefore, the risk is that Yen crosses ‘come back down to Earth’. And, the greatest vulnerabilities are a falter in market-wide sentiment or the perception that the BoJ has reached the extent of its accommodative monetary policy.

In general, most Yen crosses are ‘rich’ to the levels we saw before speculation of the first BoJ QQE program lifting the market. However, some pairs have seen the excess deflate recently. If the motivation for the Yen to gain (Yen crosses fall) is a belief that the Japan central bank has reached the end of its rope, I prefer crosses where the base currency is backed by a comparably dovish monetary policy and maintains the greatest buoyancy. In the list of crosses below EURJPY and CHFJPY most fit the bill.

Trading Opportunities of 2016: Yen Will Break Complacency and BoJ Force

Chart Created by John Kicklighter using Data from Bloomberg and FXCM’s Tradestation II

A risk aversion motivation in contrast would prove more universal for the Yen pairs. Yields from these crosses is historically very low across the board. However, there are certain pairs were the carry is thin yet prices are still very high. For USDJPY and GBPJPY, the anticipation that the Fed and BoE will be first to lift rates has afforded these particular pairs much more bullishness (and a stronger correlation to the Nikkei 225 – a sentiment metric). Yet, if risk appetite sours, the slim yields will won’t hold back the tide. It is critical with this Yen cross view that the fundamentals lead the way.

See the next Top Trade Opportunities in 2016: USDCHF Long

provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.