By Ian Stannard from BNP Paribas
The yen has continued to weaken following the BoJ’s successful intervention in September and we expect further USDJPY gains over the medium term. Indeed, portfolio flows have turned increasing negative for the yen as both foreign and domestic investors liquidate Japanese assets. It is interesting to note that the most significant shift in the flow of funds is the fact that Japanese investors appear to have reversed the repatriation flows seen in September (see BNP Paribas Daily FX Strategy Market Focus “Reversal of repatriation flows to weaken the yen” 24 October). The USDJPY seasonal factors are also currently extremely bullish. The Japanese authorities have kept up their verbal intervention with government officials also keeping the pressure on the BoJ to deliver further quantitative easing measures. Indeed, speculation that the BoJ will start to purchase foreign bonds has intensified ahead of the BoJ policy meeting on 29 th /30 th October (BoJ semi-annual outlook also released).
Given this bearish outlook for Japan, we continue to recommend yen bearish strategies. In particular we favour USDJPY long strategies given the continued out performance of the dollar. Indeed, on the 26 th September we recommended the purchase of a 3-month USD call/JPY put with a strike at 121.00, which would have cost 0.97%. However, we also recommended funding the purchase of this strategy with the sales of a one-month USDJPY 115.00 one-touch, which earned 41% of the payout. The one-month USDJPY 115.00 one touch has now expired without the 115.00 level trading. This now effectively leaves in place a free two-month USD call/JPY put option with a strike of 121.00, which is currently valued at around 2.06% (spot ref 122.60). We advise maintaining this strategy as the technical picture also remains bullish. The break through the 122.05 level has provided a bullish signal for USDJPY and the current corrective pullback from the 123.35 resistance zone provides another buying opportunity in the 122.05/121.95 area, which also coincides with up trendline support. From 122.05/121.95 we expect a break through the 123.35 barrier, opening upside potential to 125.35 and then the 126.10 July high.
However, a break below the 122.05/121.95 support will weaken the near-term outlook, triggering a deeper correction of the rally witnessed over the past month, targeting 119.70/60 (50% retracement of recent gains), from where the uptrend should be resumed.