First off, a quick note about my Q2 top trade, which was short GBP/USD, looking for 1.2750-1.2800 from circa 1.3200. The rationale behind this view was that market pricing of monetary tightening was far too aggressive relative to a reluctant hiker in the Bank of England. As it stands, GBP/USD is on course to post its worst quarterly performance since the 2016 Brexit vote, having also dipped below the psychological 1.20 level. There is an argument to be made that I was not ambitious enough in my target.
Looking ahead to Q3, I am of a bullish nature on the Japanese Yen. Two factors why: US bond yields and commodities, in particular oil prices, are both off their highs. These have been the key reasons why the Japanese Yen has been among the worst-performing currencies this year. Now that these two factors are correcting, so can the Japanese Yen as the charts below highlight.
USD/JPY (Black) vs US 10Y YieldUSD/JPY (Black) vs Brent Crude Oil
Source: Refinitiv
My view on USD/JPY is for 130 before 140, although a reassessment of this view would be necessary if bond yields and oil prices return to their highs. The risk of course with USD/JPY is the fact that the Bank of Japan (BoJ) remain the monetary policy outlier. The BoJ has doubled down on yield curve control after purchasing a record amount of bonds in a week, while central banks in the rest of the world are tightening monetary policy aggressively. What’s more, the BoJ’s actions are despite Japanese officials doubting the merits of an extremely weak currency.
Levels to Watch
Downside: 131.50 (BoJ reaction low), 130.00 (psychological level/round number), 126.36 (May2022 lows)
Topside: 135.00-20 (2002 peak), 136.71 (2022 peak)
Bias: Lower USD/JPY from 1.3600, eyeing a move towards 131.55, the view would be wrong should oil and yields return to highs and USD/JPY breaks 138.00 and if oil and yields return to the highs.
USD/JPY Chart: Daily Time Frame
Source: Refinitiv
Elsewhere, the recent slew of soft survey data in the form of US and Eurozone PMIs have prompted markets to increase the probability of a recession, more so in Europe. Moreover, should activity data show a marked drop-off an aggressive re-pricing of recession risks is likely to push cross-JPY, which is a good hedge in such an environment. This would be particularly evident across commodity cross-JPY such as AUD/JPY, which has room for a sub 90.00 move.
AUD/JPY
Source: Refinitiv
