BAML: G10 FX trade idea of the week: Short USD/JPY: FXWW

From the FXWW Chatroom – Strategy: BofAML’s FX Strategist Kamal Sharma likes to sell USDJPY this week, on broad equity market volatility and current tightening of financial conditions in the US. We have seen increased USD weakness in overnight Asia session, with markets continuing to reprice Fed hiking path (17 bps for Dec 2018, 16bps in 2019). On this end, BofAML’s STIRT desk highlights that, as we approach the 50%/60% pricing for the Dec meeting, this would actually leave the door open for the Fed to pause: the Fed would not back down when >60% is priced. Remember also last week’ note from our Quant Strategists, flagging that, one of the most persistent flows we have seen since August – i.e. USDJPY buying in Asia hours – stopped last week. On a longer term basis, note that our JPY strategist Shusuke Yamada has recently shifted his strategic view to a lower USDJPY, highlighting a peak in JPN M&A activities in 2018, Fed Fund rate approaching neutral, a slowing US economy, an increase in risky assets volatilities, JPY undervaluation from equilibrium & risks emerging from US debt ceiling discussions.

Positioning: Our latest LCBF shows that JPY is the most shorted currency in G10 space (along with NOK) relative to last year, with c. -30% net speculative positions from leverage funds and AMs as of % of open interest.

Latest CFTC FX positioning report shows that JPY short positioning currently stands at a 1-year 27% percentile rank, 3-year 15% percentile rank and all-time 9% rank.

• Levels: G10 FX Trading highlights next support level at 111.70 and resistance at 112.90.

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