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Yen Cross Opportunity in a Divergence from 'Risk'

Yen Cross Opportunity in a Divergence from 'Risk'

2017-10-03 01:32:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Risk appetite is certainly leaning higher these past months and years, but performance is uneven across the market
  • At the top end of performance over past 12 months is US and global equities, while carry and Yen crosses underperform most
  • If risk enters a new phase of enthusiasm I like USDJPY and CADJPY; but if sentiment collapses, EURJPY and GBPJPY are prone

Some Yen crosses (like AUDJPY and EURJPY) have reached remarkable highs while many other such crosses have established tempting technical patterns. How are retail traders positioning for these developments? See the DailyFX Sentiment page to find out.

If we were to use US equities as our baseline, risk trends have charged forward. Yet, not all speculative aligned assets have performed as well as the Dow or S&P 500. In fact, most that fall into the category are struggling with little progress to speak of at all over the past year. Carry trade is just such a laggard. The FX favorite yield play when measured year-over-year from October 1, 2016 is actually lower according to the Deutsche Bank Cary Harvest index which combines capital gains and reinvested carry among liquid exposures. The Yen crosses in turn have fared somewhat better, but they still suffer the same lack of commitment. The deviation from a measure like a US stock index and USDJPY highlights a gap in value that market participants are seeking. Rather than appeal for yield and income, traders favor those assets that are more highly tuned for speculative capital gains.

Falling behind the more high-flying speculative rank can present opportunity in the Yen crosses. On the hand, if appetite for higher return persists and indeed escalates to new heights and reach, the catch up that these pairs can play provide what may prove a discount for exposure to a mature trend. If perhaps sentiment can hold out long enough for global yields to pick up or at least speculation for yields jumps across the world, that can bear out considerable opportunity. In selecting specific pairs better suited for this swell, it is best to choose counterparts that are seeing their own yield and thereby speculative character improve. At the top of my list for that are USDJPY and CADJPY. The former is weighing a fifth hike in its cycle later this year and has started to reduce its stimulus program. The latter has moved to hike at consecutive meetings. Both also have technical patterns to suit the fundamental imbalance.

Alternatively, if risk trends finally succumb to fundamental gravity, the struggle from the Yen crosses could set the stage for investors who are in turn going to weigh harshly. The reality of extremely low yield to help buffer capital losses easily seen. Also, there will be less hold out for something that does not join the natural dip buying frenzy. On this side of the coin, pairs that are overindulgent on yield reach when there is nothing or little to support the push are best suited. No liquid pair is better than EURJPY than that where there is a negative yield on the Euro side and a clear focus on something to happen further into the future. However, a strong case can also be made for GBPJPY. We focus in on the Yen crosses amid risk questions in today's Quick Take video.

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Yen Cross Opportunity in a Divergence from 'Risk'Yen Cross Opportunity in a Divergence from 'Risk'

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