Yen Crosses Leading Sentiment Shift, But Momentum Requires True Capitulation
• There a few key drivers for Yen cross strength: BoJ easing, a reach for yield and policy gaps
• After years of rally, BoJ QE is having increasingly marginal return and price is far from yield income
• Extended on two fronts, the Yen crosses are far more exposed to investors appetite for thin yields
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With the volatility in global equities picking up, the focus on 'risk trends' is intensifying. One of the FX market's most responsive - and prone - areas to a sentiment shift is the Yen. There are strong parallels between these crosses and the US benchmarks like the S&P 500. Both offer a market price that far outstrips fundamental valuations, expected returns (dividends vs carry) are creating chasms versus spot, and the 'reach for yield' is easily transmitted. The fundamental gap is easily seen for the currency pairs when looking at carry differentials while the BoJ's efforts are yielding increasingly smaller gains. This leverages the dependency for further gains on risk trends. That sensitivity makes for active response to recent capital market rumblings; and it may render this segment a leading indicator for something as big, unwieldy and opaque as 'risk aversion'. We focus on Yen crosses and risk trends with a discussion on individual opportunities in today's Strategy Video.
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