Talking Points:
- A strong surge of risk appetite opened this week as one of clearest fundamental themes
- Among the benchmarks for risk trends, Yen crosses are historically sensitive and recently discounted
- NZD/JPY's range and open calendar presents a more appealing outlook than USD/JPY, CAD/JPY, GBP/JPY or other Yen cross
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The rebound in risk-leaning assets was easy to register across the financial markets Monday. Global equities, emerging market assets and volatility products all offered either sharp response or substantial historical levels to the sentiment tide change. In the FX market, this systemic fundamental theme was most readily measured through the Yen crosses. These pairs carry a historical connection to risk trends but recently for a less-than-traditional reason. Looking at the current risk-reward balance of these pairs, there is little return to be found for taking on the substantial risk of biding a market that is currently pricing virtually zero volatility. The appeal instead comes via speculation - whereby the anticipation of changing and divergent monetary policies compensates for low current income with an appetite for capital outperformance (favorable movement in the exchange rate). That said, this is a heavily leveraged dependency which makes the key players exceptionally exposed.
Of the Yen crosses, the EUR/JPY and CAD/JPY are the most richly valued pairs on a purely price basis. They have earned their advance. The Canadian Dollar has been charged higher with the Bank of Canada joining the Fed as one of the few major central banks actually tightening rates. However, that 50 basis points has leveraged a dramatic price movement that can come with a sizable amount of premium founded in mere anticipation rather than actual yield. That balance is even more dramatically skewed with EUR/JPY. Those long this pair are actually paying for the privilege as the Euro's benchmark rate is negative. All of the lift afforded EUR/JPY is forecast - which can more readily fall apart should sentiment falter. These make for high maintenance and high requirement 'risk on' plays. For the GBP/JPY, where an inverse head-and-shoulders pattern break looks like a clear technical punch; there is a dense round of event risk that can quickly drain conviction on mere fundamental distraction. AUD/JPY and USD/JPY meanwhile don't offer technical patterns that are particularly attractive.
Where some of these Yen crosses offer appeal on one or two facets, the NZD/JPY makes for an attractive option on all three fronts: fundamentals; technicals and general market conditions. On the fundamental side, this is certainly a traditional carry currency that will response to rise and fall in yield appetite. That said, conflicting event risk or themes are few. Neither currency offers up high level event risk that has historically competed with elemental sentiment - nor has even taken command of its respective currencies given the opportunity. On a technical basis, NZD/JPY has rebound from support on a large wedge pattern which doesn't carry the onus of justifying a high-flying breakout or trend. From a conditional perspective, it takes much less to cover a range - and lackluster or uneven momentum is a common trait of our financial markets int his world of complacency and skepticism. We focus on the virtues and limitations for the NZD/JPY in today's Quick Takes video.
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